The analyst prefers memory stocks like MU over HDD stocks, expecting MU to be an inevitable re-rating story and views MU as a better cyclical exposure to AI buildout.
Market is overvaluing HDD stocks as if non-cyclical, but HDD demand will eventually flatten causing revenue and EPS to fall sharply; memory stocks like MU are structurally changing and undervalued, making them preferable for exposure to AI buildout.
I’d been thinking the same for quite a while, and UBS finally called it out clearly this time: why are HDD stocks being rewarded with premium valuations while memory stocks remain undervalued? Sharing this here: "While we do not see any negative catalysts for STX or WDC in the near term, we believe it is problematic that the market is taking a structurally very different view of HDD stocks versus memory stocks, and we continue to prefer memory names — for example, MU, which we see as an inevitable re-rating story. Put a different way, the market is treating HDD stocks as if they are no longer cyclical - something we push back on aggressively as we believe customers will 2x order HDD capacity until demand starts to flatten - at which case revenue and EPS for HDD stocks will fall off a proverbial cliff. Even if we take an aggressive ~30% EB growth Y/Y, HSD% price increases, and LDD% costdowns for the next 2-3 years, STX still trades at 11x - almost 2-3 turns higher than the peak of previous cycles and the exact opposite of the expectations placed on MU despite the memory industry structurally changing. So, with a still-positive cyclical view for now and a negative structural view relative to the current peaky multiples, we remain Neutral; we continue to prefer MU and semicaps as better cyclicals to gain exposure to the AI buildout." $MU
| Horizon | Raw move | vs SPY |
|---|---|---|
| 1 day | +8.5% | +7.5% |
| 1 week | +12.2% | +11.1% |
| 1 month | +69.6% | +64.1% |
| 3 months | +92.6% | +87.2% |
| 6 months | — | — |