Micron's stock bounces higher. Is the memory trade back on?

By Britney Nguyen

One analyst says the dramatic selloffs in memory stocks mean investors can score bargains

Micron's stock has been at the center of fears rocking the memory-chip market.

Micron Technology shares bounced higher on Tuesday, as memory-chip investors got some relief after a tough stretch.

But whether the memory trade is really back on remains to be seen. While Micron shares (MU) rose about 5%, stocks broadly rallied on Tuesday on hopes that the Iran war may be close to an end.

Micron's stock is down 27.5% from its peak close achieved less than two weeks ago. Shares of Sandisk (SNDK) are down 18.8% from their recent record finish, after factoring in a 9%-plus gain in Tuesday action.

Investors in Micron's stock have been spooked by a number of factors, including the company's boost to its capital-expense forecast for this fiscal year and its disclosure that that amount could "step up meaningfully" next fiscal year as Micron invests in dynamic random-access memory and NAND.

See more: Why Micron's stock is sliding despite Nvidia-like earnings performance

Micron and other memory-chip makers have benefited in recent months from being able to raise prices as the memory market undergoes a massive AI-driven supply crunch. Chip companies had been reluctant to add capacity due to the cyclical nature of the industry, but are now looking to expand cleanroom space to address the shortages. Earlier this month, Micron announced that it had completed its acquisition of additional manufacturing space in Taiwan for DRAM products, including high-bandwidth memory.

While DRAM spot prices have reportedly pulled back, causing Citi analyst Atif Malik to lower his Micron target price to $425 from $510, he noted that there's a silver lining. "Micron and its memory peers have begun negotiations with the hyperscalers on 3-5 year strategic or long-term agreements to lock in base volumes, prepayments and adjustments to quarterly pricing based on market conditions, which should provide support to contract prices, in our view," he wrote.

Memory investors have been jittery in general about the future pricing outlook after Alphabet's (GOOG) (GOOGL) Google last week introduced its TurboQuant compression algorithm that it said improved memory usage in artificial-intelligence models without impacting performance. While some saw the launch as a problem for Micron and other memory-chip makers, others argued that more efficient computing would lead to an increase in memory consumption.

Don't miss: Micron's stock bounces, as an analyst offers a reality check on the recent panic

Richard Windsor, founder of research firm Radio Free Mobile, said the TurboQuant-driven decline among Micron, SK Hynix (KR:000660) and Samsung Electronics (KR:005930) was "overdone, as there is no sign from the market that the supply constraint on memory is easing." If TurboQuant does take off, Windsor said he sees computing demand rising, therefore leading memory requirements to either remain elevated or increase.

"I think that this is a storm in a teacup which has been greatly exacerbated by world events, meaning that the memory companies have just gone on a 20% sale," Windsor said in a Monday note.

He sees further upside for memory stocks as he thinks the top of the memory cycle is not for at least another year.

Read on: Micron's stock falls into a bear market - and it's now the cheapest in the S&P 500

Meanwhile, Bernstein analyst Mark Newman moved to an outperform rating on Western Digital's stock (WDC) on Monday, after it also slid following the TurboQuant announcement.

The specific focus of Google's compression algorithm "should have zero impact on [hard disk drive] demand and negligible impact on NAND demand," Newman wrote.

Newman said the selloff among memory and storage stocks makes for "an attractive entry point" for investors considering Seagate Technology (STX), Western Digital and SanDisk (SNDK).

-Britney Nguyen

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