Embattled semiconductor firm Micron Technology (NASDAQ:MU) — which specializes in memory chips that integrate in various digital devices — received bad news from Morgan Stanley. The investment management stalwart downgraded MU stock to “underweight” from “equal-weight,” along with assigning shares a $56 price target, causing about a 3% loss in late morning trading. Economic concerns which impact Micron’s key revenue sources represent a worrying headwind.
Morgan Stanley analyst Joseph Moore sees a dim outlook for Micron, disagreeing with the idea that the company has a more favorable framework following a conservative guidance for the upcoming quarter ending Aug. 31, 2022. “While Micron likely guided conservatively relative to their outlook at the time, the market continues to deteriorate, both volume (the primary reason for the weaker guidance) and pricing,” Moore stated in a research note.
Further, the analyst suggested that the upcoming pressures impacting MU stock “is less about demand and more about inventory, as customers in all markets listened to the substance of Micron’s commentary – that shipments this quarter and next will be well below production, with a large Micron inventory build by year end – and start to release inventory buffer.”
Thus, Moore noted that multiple customers “are taking a more aggressive approach to inventory management in light of this commentary.”
Economic Realities Weigh on MU Stock
Late last month, CNBC reported that Micron disclosed expectations that smartphone sales will be meaningfully lower than previously expected for the rest of 2022. Reduction in consumer demand represented the core basis for the downgraded outlook.
On this context, Morgan Stanley’s pessimism toward MU stock isn’t surprising. Essentially, the issuing company has warned about the risks impacting key revenue sources. Micron is a major vendor of memory chips for PCs and smartphones.
Interestingly, Micron CEO Sanjay Mehrotra also discussed supply side concerns, noting that PC and smartphone customers were “adjusting their inventories.”
Indeed, other researchers corroborate the semiconductor firm’s assessment of its key revenue drivers. According to data from HMD Global, over 60% of Android consumers opted for budget phones in the first quarter of 2022. Further, two-thirds of U.S. Android smartphone users only spent $250 or less on their phones during the same quarter.
Therefore, the above information suggests that MU stock is not immune to the inflationary crisis impacting much of the globe. While certain economic pressures might not directly affect Micron, if its customers are impacted, then the pain will only travel upwind.
A Possible Canary in the Coal Mine
Prior to Morgan Stanley sounding the alarm bell on MU stock, analysts generally held optimistic views of Micron. Per Schaeffer’s Investment Research, 18 out of 23 covering analysts carried a “buy” or better rating. As well, the 12-month consensus price target of $78.09 features a sizable premium over the current price.
However, Morgan Stanley could shift perceptions about not only MU stock but other semiconductor firms. Therefore, investors need to be careful about wading into these waters.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
