Shares of Micron (MU) fell nearly 4% yesterday after Goldman Sachs analyst Mark Delaney threw in the towel on the chip giant. Delaney downgraded the stock from Buy to Neutral, arguing that Micron’s gross margin is set to decline sequentially from 4QCY18 through mid CY19, and the stock is historically well correlated with its gross margin. The analyst also slashed his price target for MU to $50 (from $68), which implies a 15% upside from current levels. (To watch Delaney’s track record, click here)
Delaney stated, “Our view of margin declines is due to lower memory ASPs, both from more challenging DRAM S/D conditions and also NAND oversupply. Our now more negative view of memory fundamentals is consistent with our report published post the Flash Memory Summit in August about incremental weakness in both DRAM and NAND fundamentals per our discussions with industry contacts, and also based on our supply/demand analysis (we provide detail on both of these items later in this note). Further, our CY19 EPS estimate which was already 21% below current consensus is now 31% below the Street (reflecting the incremental weakness we expect in both DRAM and NAND).”
Furthermore, “Memory downturns usually last for several quarters and can see an acceleration in price declines, as customers delay procurement to wait for lower prices when possible, causing a snowballing effect that can lead downturns to be worse than initially anticipated by investors […] Our below consensus 2019 EPS estimate implies a more benign DRAM downturn than historical cycles in terms of the magnitude of ASP decline, which we believe could occur given difficulties shrinking and with Samsung already pushing out its Pyeongtaek fab ramp (before contract pricing had even declined), which illustrates improved industry discipline and profit focus,” the analyst added.
Most of the Street is far more confident than Delaney’s sidelined stance, with TipRanks analytics showcasing MU as a Strong Buy. Based on 22 analysts polled in the last 3 months, 17 rate a Buy on Micron stock while 5 maintain a Hold. The 12-month average price target stands at $78.29, marking a nearly 88% upside from where the stock is currently trading.