Micron Analysts Stay Bullish Amid Cycle Turning, Demand-Supply Tightness

Micron Technology, Inc.

Benzinga · 12/19/2019 16:16

Micron Technology, Inc. (NASDAQ: MU) reported fiscal first-quarter results that exceeded estimates and suggested the second quarter may mark a bottom in terms of its financial performance.

The Analysts

Goldman Sachs analyst Mark Delaney reiterated a Buy rating on Micron and raised the price target from $59 to $66.

Bank of America analyst Simon Woo reiterated a Buy rating and lifted the price target from $60 to $70.

Rosenblatt Securities analyst Hans Mosesmann maintained a Buy rating and upped the price target from $80 to $100.

UBS analyst Timothy Arcuri maintained a Neutral rating and $47 price target.

Mizuho Securities analyst Vijay Rakesh maintained a Buy rating and hiked the price target from $53 to $61.

Wells Fargo Securities analyst Aaron Rakers maintained an Overweight rating and increased the price target from $60 to $70.

KeyBanc Capital Markets analyst Weston Twigg maintained an Overweight rating and raised the price target from $59 to $63.

See Also: Micron Trades Higher On Q1 Sales Beat

Micron's Valuation Is Supportive

Micron's DRAM revenues rose 2% sequentially, exceeding forecast for a flat performance, with DRAM bits climbing 10% and ASPs declining in upper-single digit percent range, Delaney said in a note.

NAND revenues climbed 18% sequentially, also exceeding Goldman's 12% estimate. The company said demand from datacenter customers was strong, and attach rates and capacities from client and consumer SSDs rose.

Guidance was lukewarm, with revenue outlook surrounding the consensus estimate and the bottom-line guidance indicated to come in line or below the consensus. Goldman is encouraged by the company's belief that its business will bottom cyclically in the February quarter.

The firm said it sees several positive signs to support Micron's view on the cycle turning, including inventory reduction and the company's belief that DRAM inventories will normalize in the next few quarters.

"We continue to believe that valuation is supportive in the context of our view that industry supply/demand dynamics are improving in CY20," Delaney wrote in a note.

3 Catalysts For Micron

Micron's stock performance will depend more on the second-half and fiscal year 2021 earnings, Woo said. The analyst sees three specific catalysts for Micron: stronger turnaround of the memory cycle, free cash flow generation for share buyback and a low multiple.

See Also: UBS Lowers Micron Price Target, Says DRAM Cycle Deteriorating Faster Than Projected

Early Phase Of Recovery Sets Micron Up Well

Early phases of a memory cycle recovery have started, as reflected by incremental market signals of shortages and improving contract prices, Mosesmann said, and supply discipline is pointing to a recovery as 2020 plays out.

The analyst said investors should take advantage of those on the Street who are obsessed with the exact timing of the cycle recovery.

Rosenblatt recommends Micron given its successful execution, improving product stack to non-commodity sticky memory varietals, 50% FCF return to investors and investment grade credit ratings from three key credit agencies.

Stock Already Baking In Very Healthy Recovery

Micron's stock is already reflecting a very healthy recovery for about a full year ahead of fundamentals, Arcuri said. The stock is now discounting nearly $6 billion per year in free cash flow. Even with a healthy pricing recovery, the analyst said the company is unlikely get to the numbers even in 2022 or 2023.

"The shape of the recovery is now the main debate, and we still believe it will be more gradual in nature until maybe 2021 - a long ways out," Arcuri wrote in a note.

2020 Estimates Sets Up Well

With Micron seeing a February quarter trough, the estimates for 2020 sets up well, with improving top-line and gross margins, as DRAM-NAND supply demand moves into balance, Rakesh said. The analyst sees potential undersupply into the second half of 2020 and 5G/Data center as drivers.

Micron commentary should be positive for Western Digital Corp (NASDAQ: WDC) despite weak investor sentiment, according to Mizuho.

Micron Is Structurally Different Company Than Prior Down Cycles

Industry data points support Micron's trough call, and sustained profitability providing incremental confidence in the view that Micron is a structurally different company than prior down cycles, Rakers said. The analyst noted Micron sustained profitability at trough, and said he sees the server DRAM shortages as a positive.

"…we think investors will consider Micron drive to $7-$8/sh. EPS," the analyst wrote in the note.

Setup Is Compelling For Micron

End demand drivers are relatively robust, driven by technology over macro trends, Twigg said. At the same time, supply is constrained as memory suppliers have restricted expansion for several quarters.

"We believe the setup is compelling for MU, and we're raising our PT to $63," KeyBanc said.

Price Action

Micron's stock traded higher by 3.1% to $54.68 per share at time of publication.

Photo credit: Trio3D, via Wikimedia Commons