Micron (NASDAQ:MU) won a confidence vote from Morgan Stanley analyst Joseph Moore yesterday. The analyst is aware that the chip giant’s volatility makes it a challenge to assess value for “what’s in the price;” especially considering fierce shifts in earnings power stemming from subtle nuances from demand to supply. When diving into the stock’s earnings volatility, the analyst eyes long-term margins and spotlights strength in the short-term that could lead to considerable upside for this tech leader. Wall Street is taking note and clearly liked what they heard, charged to buy into the enthusiasm yesterday.
The analyst reiterates an Overweight rating on MU stock with a $65 price target he calls “reasonable,” suggesting a 26% upside from current levels. (To watch Moore’s track record, click here)
“Valuing MU on forward P/E multiples is useful for judging trading patterns, but is not fundamentally sound given earnings volatility,” explains Moore, who adds room for some caution in projecting past the next 12 months: “We viewed the stock as an investment at the low point of the cycle, but have treated it more as a trade at these levels, and while we are quite positive short term, we remain so as a function of momentum, not valuation – we’ll still likely want to reduce risk if we think margins are at risk of erosion.”
Glancing past the next 12-months, the analyst prices in an annuity that mirrors average cash flow margin throughout the course of a business cycle. Some of the assumptions Moore makes includes that the MU team has set an outlook to a 12% tax rate for the long-term as well as depreciation to rise from current levels, should roughly 7-year depreciation terms arise on especially big levels of capital expenses for this year and the next. Additionally, the analyst projects a wider gap in capital expenses and depreciation in scenarios where lofty sales continue.
Moore argues, “We see a positive risk/reward skew from here. In a world polarized by the view that the stock can go to $100, or that the stock has downside to $35, we have maintained a middle road that the stock can get to $65, and have let the stock price dictate our enthusiasm.”
Regarding strength in the short-term, the analyst finds a correlation between the second fiscal quarter earnings apprehensions for the memory market as a whole to what happened during the first fiscal quarter’s print release. “The Apple quarter creates some concerns, but in many ways less so than 3 months ago – while Apple inventories are up, non trade receivables are down much more, and our checks show that absolute raw materials inventory levels at Apple are not excessive,” highlights Moore, continuing that especially in the cloud market, conditions extending past the smartphone arena appear more robust than anticipated “across the board.” DRAM price stability cannot be ignored, and the analyst likewise believes investors can get more confident approaching better seasonality. Even if NAND pricing come under hot water, Moore contends the MU team will dial down costs to essentially align with any dips in price. Bottom line, short-term conditions “are in fact exceptional,” and Moore looks more of the same with cloud spending that has bolstered such strong conditions to have odds to sustain.
TipRanks suggests a strong bullish consensus in Micron’s camp. Out of 22 analysts polled in the last 3 months, 18 rate a Buy on the chip giant, 3 remain sidelined, while 1 is bearish on the stock. With a healthy return potential of 44%, the stock’s consensus target price stands at $73.67.