It seems like black clouds are rolling in over Micron (MU).
In December, the company reported a slowdown in revenue and a drop in the prices of DRAM and NAND chips. Margins are tightening and profit is narrowing. The guidance for the third quarter left investors nervous as revenue growth is expected to go into the negatives.
Yet, Ambrish Srivastava from BMO Capital is turning himself over from bear to bull. The analyst upgrades the stock from Market Perform to Outperform and raises the price target from $32 to $50, showing a potential 48% upside. (To watch Srivastava’s track record, click here)
“We are reversing our bearish stance on Micron. While fundamentals will likely get worse before they get better, we believe the shares have bottomed out and are hence upgrading the stock,” the analyst asserts. “Our reversal in thinking is driven by a combination of the following two factors – valuation and a structurally more profitable company, which will lead to FCF generation even under rather dire scenarios that we are modeling for.”
“The shares currently trade at a P/B of 1.1x. While in the past Micron had negative FCF during cyclical troughs, and not long ago, in the last trough had negative FCF of $2.6 billion in FY16, we do not see a repeat of negative FCF occurring even under pretty dire pricing scenarios that we are baking into our estimates,” Srivastava justifies.
When it comes to DRAM, MU had a lot of ground to cover when comparing to bigger rivals like Samsung and SK Hynix. “We estimate that vs. the prior peak, Micron’s cost structure is better by about $2 billion. The company has also managed to close the gap in margins vs. the larger rivals. We estimate the gap to be lower from 9 percentage points to about 6 points. Micron has been able to reduce its cost faster than the rivals,” Srivastava said.
Looking ahead, the analyst suggests when it comes to free cash flow, his analysis suggests DRAM ASP must fall more than 44% from the level in the first quarter of the fiscal year (or lower than $3.80/GB) in order to get close to a break-even free cash flow. If that scenario would play out, Srivastava says he’d expect Micron to further lower capex and manage its opex.
Where does the rest of the Street side on this chip player? It appears mostly bullish, as TipRanks analytics demonstrate MU as a Buy. Out of 27 analysts polled in the last 3 months, 17 are bullish on Micron stock, 9 remain sidelined, while only 1 is bearish. With a return potential of nearly 45%, the stock’s consensus target price stands at $48.86. (See MU’s price targets and analyst ratings on TipRanks)