Bank of America Downgrades Micron Technology

Bank of America (BofA) downgraded Micron Technology (NASDAQ:MU) shares from Buy to Neutral, citing a weaker-than-expected gross margin (GM) outlook for the second and third fiscal quarters.

Micron's shares fell more than 12% in premarket trading on Thursday, as investors reacted to disappointing Q2 guidance provided a day earlier. The company anticipates second-quarter sales of approximately $7.9 billion, which is below BofA's estimate of $8.3 billion and the consensus of $9 billion.

Additionally, the projected Q2 GM of 38.5% falls short of both BofA's 40% expectation and the consensus of 41%.

BofA analysts, led by Vivek Arya, noted, "Data center and HBM trends remain strong, but weakness in PC and phone markets are putting downward pressure on memory pricing, especially in NAND."

The firm expects NAND pricing challenges to continue into the third quarter. Despite their positive outlook for Micron in the high-bandwidth memory (HBM) and AI market, BofA has cut its fiscal year 2025/2026 pro forma earnings per share (EPS) estimates by 5% and 11% to $6.80 and $8.78, respectively.

They also revised the stock's price target down to $110 from $125.

Historically, the stock has struggled to outperform when GM expansion is muted, prompting the downgrade from Buy to Neutral, even as BofA maintains a positive view on MU’s standing in the HBM/AI market, where the total addressable market (TAM) is projected to grow by 20% for CY25 to $30 billion.

Among the positives, BofA pointed out Micron's strong performance in the data center and HBM sectors. However, they cautioned that weakness in the PC and phone markets negatively impacts memory pricing, particularly NAND.

BofA believes there's a chance for recovery in the PC and phone sectors during the latter half of calendar year 2025, important as they account for a substantial part of DRAM and NAND demand.

The report also cites risks such as high inventory levels in PC and phones, which could pressure pricing through early 2025. Micron plans to scale back NAND production in the second and third fiscal quarters to align supply with demand.

Additionally, they increased the capital expenditure (capex) forecast for FY2025 to about 40% of sales, up from 35%, to support HBM growth, with the tax rate expected to rise to the high teens for FY2026/2027.