Micron, Chip Stocks at Risk of Deteriorating Industry Fundamentals: Morgan Stanley

Shares of global chip makers took a tumble on Thursday following a warning from one large equipment company executive and a Wall Street firm citing rising pricing pressure and inventories in the red-hot market. 

(See also: Avoid These 2 Tech Hardware Stocks: Evercore.)

In a "Sound Bites" audio call on Wednesday, Morgan Stanley analysts were bearish on shares of memory chip players like Micron Technology Inc. (MU), stating that demand has deteriorated versus expectations, as reported by CNBC. Meanwhile, KLA-Tencor Corp. (KLAC) Chief Financial Officer (CFO) Bren Higgins lowered his outlook for the remainder of 2018 at a tech conference on Thursday, stating that the December quarter "feels like it will be up a lot less" than initially forecasted. 

Micron shares fell nearly 10% on Thursday, dragging the iShares PHLX Semiconductor ETF down 2.6%. Equipment maker KLA-Tencor ended the day 9.7% lower, while competitor Applied Materials Inc. (AMAT) was down 5.2%. 

Three Big Drivers for Demand Worsened Substantially Over Past Weeks

"For DRAM [memory chip], demand is weakening, inventory and pricing pressures are building, and vendors are struggling to move bits," said Morgan Stanley's Shawn Kim. "In NAND [flash memory], there is just too much supply. Earnings risks are emerging from 3Q and our cautious view on memory is playing out."

In August, Morgan Stanley lowered its rating on the semiconductor industry from in line to cautious, highlighting elevated inventory levels. Kim noted that recent conversations with industry salespeople and buyers signaled a more negative environment for the memory market, as reported by CNBC. He indicated that the "three big drivers" for demand, comprised of PC, mobile and data center, have worsened "actually quite substantially" over the past two weeks, piling inventories at manufacturers like Samsung and Hynix. As a result, he expects prices to go lower into the third quarter.

Not all are so bearish. In a note to clients entitled "Earnings fundamentals solid," Bank of America Merrill Lynch reiterated its outperform rating on Micron shares.

"We believe the recent share-price correction is mostly based on concerns of a downturn. Our research indicates record-high revenue/profit," wrote BofA. 

(See also: 5 Tech Hardware Stocks to Outperform: MarketWatch.)

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