With all that is going on with the US-China trade war and the NAND/DRAM markets still in recovery mode, is it really time to invest in Micron (MU)?
The company has seen its stock price plummet 20% since last month, on resumed tension between the US and China. Investors are rightfully concerned, as Micron generates more than 50% of all revenue from the Chinese market. But some argue that this is only temporary, with a US and China “peace” coming sooner than later. On the other hand, some say this is just pushing back the recovery even further and contributing to even lower prices.
While analyst Sidney Ho of Deutsche Bank is lowering his financial outlook, the analyst maintains his Buy rating and $45 price target on shares. (To watch Ho’s track record, click here)
The main reason Ho is lowering EPS estimates is because of the recent ban on US companies doing business with China’s Huawei and “incremental memory pricing weakness.” The analyst has cut EPS for 2019 and 2020 by about 25% and 20%, respectively, but doesn’t expect this to play a role in the stock long-term as he anticipates “some resolution for the Huawei situation [to] be reached by the end of CY19.”
Ho believes memory suppliers “have become more disciplined about capital spending and supply growth,” which will help the sector avoid the type of drought it is currently experiencing. But right now, the analyst believes “demand shock [being] driven by the latest Huawei ban will again test how the memory market has transformed.” Though Ho expects a “temporary setback in overall demand,” he also believes “memory suppliers [will] take swift actions to reduce supply growth through further cutbacks in capex and fab utilization aimed at reducing inventory build.”
Micron is a ‘buy’ in the eyes of Ho, as the company has focused on technology advancement and strengthening its balance sheet and cash flow. Though Ho doesn’t discount the Huawei ban, and thinks it “could lead to share shift towards it competitors in the near term,” he still expects the company to “continue to close the technology gap (and hence profit margins),” while “its financial discipline should lead to the company generating positive free cash flow and maintaining positive net cash at the trough of the cycle.”
All in all, Micron is in a hole right now, as it is caught in the crosshairs of a trade war between the US and China, something clearly out of its control. So while investors are not blaming the company for the recent plummet in its stock, many are still wary in the short-term. But nonetheless, Wall Street sizes up MU as a ‘Moderate Buy’ stock, as the bulls edge out the cautious on the chip giant. In the last 3 months, Micron stock has received 13 bullish ratings versus 6 analysts hedging their bets, and 4 bears who doubt the company can secure a turnaround. The consensus price target of $50.37 hints there could be upside for investors, with the stock fetching $33.90. (See MU’s price targets and analyst ratings on TipRanks)