Supply-Demand Imbalance In Memory Chips Triggers Analyst's Micron Upgrade

Projections of a continued supply-demand imbalance in the semiconductor industry into 2022 has led BMO Capital Markets analysts to turn bullish on shares of Micron Technology, Inc. MU.

The Micron Analyst: Ambrish Srivastava upgraded Micron Technologies from Market Perform to Outperform and increased the price target from $90 to $110.

The Micron Takeaways: Srivastava forecast supply and demand expectations for DRAM memory chips going into 2022 in a Wednesday note.

Supply in 2022 will lag demand to a greater extent than seen in 2021 due to a major transition to the use of DDR5 memory chips, the analyst said.

This shift will occur because DDR5 chips offer better power and memory efficiency, increased scalability and lower latency levels compared to the previous DDR4 chips, he said.

Heightened demand in both the 5G handset industry and data center market for AI-based servers, which command 4-6x more DRAM, will more than offset the ongoing decrease in PC demand through 2022, Srivastava said. 

On the supply side, the analyst said chipmakers have been incredibly disciplined with capex spending, meaning they will likely not increase production capabilities to match cyclical demand. Furthermore, DDR5 chips require more raw materials, as the additional logic-boards required for their performance improvements increase their size by roughly 10%-15%, he said. Finally, a more than likely lack of 2021 year-end inventory provides further tailwinds for the supply-demand imbalance going into 2022, Srivastava said.

Putting the increased demand together with lower chip inventories, Srivastava predicts a 94.4% supply-demand imbalance in 2022, compared to 95.7% and 100.8% in 2021 and 2020, respectively. Consequently, this places upward pressure on memory pricing, which has already grown steeply in the second quarter, the BMO analyst said.

BMO's price target increase results from a combination of increased earnings expectations and a higher P/E multiple (15x v.s. 13x) used to value Micron.

MU Price Action: Shares of Micron Technology were up 2.18% at $84.74 ahead of the close Wednesday.