Shares of Western Digital (WDC) are falling after Morgan Stanley analyst Katy Huberty downgraded the stock to Equal Weight as she sees a peak approaching in the NAND memory market. Meanwhile, her colleague Joseph Moore raised his price target for Micron (MU) and argued that the shares should be bought on any NAND-related weakness.

BEARISH ON NAND, BULLISH ON DRAM: In a research note to investors, Morgan Stanley analyst Joseph Moore noted that while he has been bullish on memory for the last 12 months without the need to differentiate between the commodities, it is going to be “important to increasingly differentiate” between DRAM, which he expects to remain strong, and NAND. DRAM long-term cycle indicators, as well as short-term checks, look positive, he contended, adding that the disparity between DRAM EBITDA and capital spending is unprecedented, as DRAM profits have subsidized the strategic nature of the NAND transition. On the other hand, Moore pointed out that NAND short-term checks now show modest deceleration, but the cycle indicators make him more cautious. NAND has seen an unprecedented surge in spending, is likely to see supply accelerate from 35% growth in 2017 to 45% in 2018, and has high elasticity of demand in all segments, the analyst argued, noting that there is also simply a higher margin for error in forecasting supply, given the nature of the NAND transition. While acknowledging that there is a common risk to be aware of between the two commodities, namely customer inventory accumulation, Moore believes the risks feel higher for NAND.

BUY MICRON: Morgan Stanley’s Moore recommended investors buy Micron on any weakness related to the NAND market dynamics and raised his price target on the stock to $55 from $39. The analyst noted that NAND is only one third of Micron’s sales. He also argued that there is some hidden protection in the fact that its NAND cost structure is improving faster than peers and the product quality is also improving faster as first and second-generation 3D are qualified with new customers, which could protect from price erosion. The analyst reiterated an Overweight rating on equipment names Applied Materials (AMAT) and Lam Research (LRCX) expecting a strong first half of 2018, but said he sees some potential second half of the year challenges in the more negative NAND scenarios.

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