Micron Technology, Inc. Guidance Lift Puts Robust Datacenter Demand in the Spotlight, Says Goldman Sachs

Goldman Sachs' Mark Delaney anticipates Micron's upside stems from an impressive datacenter market- particularly in DRAM.


Micron Technology, Inc. (NASDAQ:MU) got an exciting 11% snap in the stock yesterday after positively revising its second fiscal quarter revenue guide up for 2018 (along with EPS outlook) and cherry-picking David Zinsner as CFO, effective February 19th. Current CFO Ernie Maddock is set to stay in an advisor role following his retirement through the beginning of June to assist with the leadership transition.

Goldman Sachs analyst Mark Delaney takes the guidance raise in bullish stride, noting it is “likely” that the lifted guide speaks even more to robust datacenter demand; a move that aligns with the analyst’s latest encouraging DRAM pricing checks.

Moreover, the analyst deems Zinsner an experienced pick who has promising plans to realize a stronger performance for the memory chip giant.

In reaction, the analyst reiterates a Buy rating on MU stock with a $55 price target, which implies a just under 29% upside from current levels. (To watch Delaney’s track record, click here)

“Mr. Zinsner has over 20 years of financial and operations experience in the semiconductor and technology industry […] We had the opportunity to meet Mr. Zinsner when he was at ADI, and we believe he presented a clear strategy to improve financial performance and margins,” writes Delaney, adding that in terms of the guidance jump: “Preliminary results suggest datacenter strength continues to drive memory cycle (especially in DRAM).”

The former guide Micron had set for revenue ranged between $6.80 and $7.20 billion. Now, the company anticipates between $7.20 and $7.35 billion in revenue for the second fiscal quarter of 2018- with the print anticipated by March 22nd. The new outlook’s midpoint sails 4% ahead of FactSet consensus at $7,017 billion and the analyst’s previous forecast of $7,000 billion.

The new non-GAAP EPS outlook has been bumped up from a range of $2.51 to $2.65 up to a range of $2.70 to $2.75. The midpoint hovers around $0.15 over the Street’s 2.58 and approximately $0.14 ahead of the analyst’s previous estimate of $2.59.

Accordingly, the analyst takes his fiscal 2018, 2019, and 2020 estimates on an upturn: for fiscal 2018, the analyst looks for $10.18 in EPS from a former estimate of $9.67; for fiscal 2019, the analyst angles for $6.77 compared to his prior forecast of $6.66; and by fiscal 2020, the analyst calls for $4.60 in EPS, a maintained expectation. The analyst’s fiscal 2018 EPS expectations rise on back of better sales and margins, with Delaney pointing to climbing average selling price (ASP) assumptions (especially in DRAM). However, Delaney’s out-year EPS projections continue largely the same due to a more expensive tax rate, which the MU team indicated would increase at a recent investor conference.

Overall, “While Micron did not provide detail on the reason for the guidance change, we believe based on recent peer comments and our industry discussions that upside is being driven in particular by strength in the datacenter market (especially in DRAM). While we continue to believe that the memory upturn is in the middle to later innings, we believe DRAM S/D will remain tight in 2018 (especially in 1H18 due to limited supply growth). We view valuation as attractive with Micron trading at sub 4X forward EPS and at 7X normalized EPS despite its improved balance sheet, returns, and FCF,” Delaney surmises.

TipRanks highlights strong bullish sentiment rising through the Street on this memory chip giant. Out of 19 analysts polled in the last 3 months, 17 are placing a Buy on MU stock with just 2 maintaining a Hold on the stock. With a return potential of nearly 38%, the stock’s consensus target price stands at $59.25.