Investors fully understand that the chip industry is highly cyclical, so perhaps most investors aren’t too concerned or surprised that Micron’s (MU) performance has been lacking lately. The chip-making giant reported disappointing numbers in its December earnings release, including slowing revenue and profit. The company expects these trends to continue into 2019, as the industry is still plagued by lower demand and high supply.
Morgan Stanley analyst Joseph Moore remains cautious on Micron with an Equal-weight rating (i.e Hold), and a $33 price target, which implies a slight downside from current levels. (To watch Moor’s track record, click here)
Moore acknowledges the company is doing poorly, and does not “see a quick reversal from recent weakness.” The analyst says he sees value in the stock, but does not expect a rebound at any point in 2019, especially for DRAM.
One short-term concern is inventory — Moore notes that Micron is holding way too much supply on its books. The company “reported November quarter inventory of 107 days…[which] would be the highest level in 18 years,and is 26 days higher than the 5 year average.” This type of industry takes investors back to the basics of economics — the supply and demand curve. As supply increases and demand decreases, prices usually drop. This is exactly what is happening with Micron, and high inventory is not helping their case at all.
But Moore does not blame Micron fully. He says, “this (high inventory) is [not] isolated to Micron, as our channel checks show comparable builds at peers in the 4th quarter. If anything, it understates the problem, as we believe Micron worked hard at the end of November to minimize balance sheet inventory,and has been quiet since, as the 2 DRAM competitors work hard to do the same thing at the end of December. The different timing of quarter ends probably understates the total inventory build.”
Moving forward, Moore is more optimistic. He says, “there are reasons to be positive on the stock…if someone is invested in the stock because there is tangible book value support in the high 20s (and rising) which minimizes downside, offering a free option on any potential upside surprises with the patience to wait for a 2020 recovery for a stock trading at 3x peak earnings, we wouldn’t disagree,” adding it is with this logic that keeps him equal weight.
The rest of Wall Street largely buys into what the chip giant has to offer, as TipRanks analytics reveal MU as a Buy. Out of 26 analysts polled by TipRanks in the last 3 months, 17 are bullish on Micron stock while 8 remain sidelined and 1 is bearish. With a return potential of 45%, the stock’s consensus target price stands at $49.05. (See MU’s price targets and analyst ratings on TipRanks)