Analysts share insights on chip maker Micron Technology, Inc. (NASDAQ:MU) and software giant Oracle (NYSE:ORCL), as one company struggles to meet the Street’s estimates due to slowing PC and mobile demand while the other shifts its business model towards a platform that includes a cloud subscription component.
Micron Technology, Inc.
Sidney Ho of Deutsche Bank reiterated a Buy rating on Micron, while lowering her price target from $17 to $16, ahead of the company’s F2Q16 results on March 30th. Despite the reduced target, Ho is still optimistic on Micron’s performance in the long term.
Ho decided to lower estimates for MU due to slower PC, mobile, and server end demand, continued DRAM price pressure, and worse than expected financial performance of Inotera. Despite the short-term caution, Ho remains optimistic that MU will “execute on its technology roadmaps, driving relative outperformance for its revenues and gross margins” beginning I the second of CY16.
According to Ho, PC build was weak in C1Q, leading to excess inventories in the PC supply chain in addition to declining prices for PC DRAM (~13% q/q). She sees greater season decline in demand in those two markets as suppliers have “aggressively” shifted their DRAM production towards mobile and data centers. Further, she believes the demand weakness will continue into C2Q with an 8-10% decline in DRM ASP. Ho writes, however, that the price decline will slow as “some suppliers have backed off from participating in very aggressive pricing.”
Ho is optimistic for a 2H 2016 recovery as she expects MU to benefit from the 20nm transition as it achieves bit cross-over by May. Further, “In NAND, the ramp of Gen 1 TLC 3D NAND should significantly improve its cost structure (25% cost reduction vs. 16nm planar) starting in C4Q.” Ho also sees upside potential with her bit growth and cost improvement assumptions if MU “executes on its technology and manufacturing roadmaps outlined.”
According to TipRanks which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Sidney Ho has a yearly average loss of 6.1% and a 51% success rate. Ho is ranked #3388 out of 3765 analysts.
As of this writing, of the 22 analysts polled by TipRanks (in the past 3 months), 16 analysts are bullish on MU stock, 5 are neutral on the stock, and 1 is bearish on the stock. The average price target for MU is $16.75, which represents a 46.16% upside.
Jeffries analyst John Difucci maintains a buy rating on Oracle with a price target of $50, as Oracle transition from a license and maintenance model to a model that includes a cloud subscription component.
Difucci believes that Oracle’s transition or “expansion” of their business model from license + maintenance to a model that includes a cloud subscription component is a “pressing issue” for the stock. He estimates that Oracle’s new business grew 4% in F15 and has declined 1% YTD in F16, “but will likely grow about 1% for the year,” in comparison to declines of 4% and 12% respectively with the traditional license.
Cloud subscription, according to Difucci, reflects less initial revenue and profit relative to the same capacity of license + maintenance model however, it materially surpasses the traditional model on both metrics but 51% and 48%, respectively or 24% and 15% (including the time value of money) over the assumed 20-year lifetime of the customer, assuming similar renewal rates. Difucci explains that it takes “It takes 6 years for revenue for the cloud model to surpass that of the traditional model and it takes 8 years for the Cloud profit to exceed Traditional profit. When taking the time value of money into account, it takes 7 and 12 years, respectively.”
Difucci concludes that he does not believe that “current estimates reflect the likely future cloud revenue to be realized by new ARR signed over the last year that hasn’t yet begun to be recognized primarily due to sale promotions.” He estimates that this represents about $320 million of ARR ($80M quarterly revenue) that will flow into Oracle’s income statement over the next couple quarts along with any new ARR signed during that period during that period.
According to TipRanks which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst John Difucci has a yearly average return of 1.6% and a 49% success rate. Difucci is ranked #1367 out of 3821 analysts.
As of this writing, of the 23 analysts polled by TipRanks (in the past 3 months), 12 analysts are bullish on MU stock, 9 are neutral on the stock, and 1 analyst rates the stock a Sell. The average price target for ORCL is $44.47, which represents a 7.03% upside.