Micron (MU) Loses a Bull, Sending Shares on a 6% Dip

Morgan Stanley's Joseph Moore is stepping to the sidelines on MU, pointing a finger at valuation.


Micron Technology, Inc. (NASDAQ:MU) investors are taking a step back today amid the news that a former bull has retreated to the sidelines, sending shares sliding 6% in trading. Morgan Stanley analyst Joseph Moore notes that though he has been upbeat on the memory sector for two years running, he is shifting to a neutral perspective due to valuation.

Though DRAM continues to be robust, this strength appears baked into the stock, making shares fully valued and “very close” to Moore’s target expectations. Moreover, Moore believes, “we see the 2h NAND recovery that bulls are looking for as increasingly unlikely.”

As such, the analyst downgrades MU stock from an Overweight to an Equal Weight rating with a $65 price target, which implies a close to 11% upside from current levels. (To watch Moore’s track record, click here)

“We see memory markets as structurally improved vs. history, but still think that current valuations price that in, leaving little room for upside. Our views are only slightly more cautious on pricing, as we have been cautious on NAND since November, and we remain reasonably bullish on DRAM prospects this year. But with Micron’s recent surge, we think that the stock prices in a very upbeat long-term scenario, and any erosion in fundamentals will be punished,” explains Moore.

The analyst continues that though he is quick to make the neutral call, he chooses to play it safe on Micron: “We think that this call will likely be a bit early (our upgrade was as well), and there isn’t urgent need to sell stocks – but given the unpredictability of these businesses, and the 40% move in the stock in 3 weeks, we would rather err on the side of caution in an environment where we can see storm clouds on the horizon.”

Now that the stock is closer to $60, if Micron leaps any higher, the analyst makes a case that he would have to see stellar short-term stock driving conditions sustaining through the rest of 2018 and possibly through the beginning of 2019 to spot more upside. Considering Moore now feels he is coming across as a longer-term bear in chats lately, this signifies to him the “pendulum” has whipped from overly negative half a year ago, and even just a few weeks ago to a present-day sentiment that appears “overly optimistic.” Even if data points essentially have remained the same, there is simply not as much enthusiasm circling “a seasonal rebound from our industry contacts than we heard just a few weeks ago,” asserts Moore.

DRAM pricing could still soar during the third quarter and fall roughly flat in the fourth quarter, should “exceptionally strong economics” keep going. That said, between shortages and a substantial scale-back in “urgency,” the once confidence roaring for the third quarter performance is not as high as two weeks ago, taking under account certain “cloud pushouts.” With regard to NAND, the analyst already turned to a negative perspective in November of 32017, and spotlights clues of positivity seen in the first half of 2017 starting to subdue.

Following Micron’s analyst day, shares bounced. Now, Moore sees a stock discounting operating margins over 30% past a “peak” period of 50% to 55%, which he contends is “high enough” to leave the bulls on Micron to the sidelines. Ultimately, it boils down to Moore’s ideal approach to sizing up Micron’s longer-term valuation.

TipRanks reveals a strong bullish consensus liking the odds on the chip giant. Out of 24 analysts polled in the last 3 months, 19 are bullish on MU stock, 4 remain sidelined, while 1 is bearish on the stock. With a return potential of 30%, the stock’s consensus target price stands at $76.65.

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