Micron (MU) stock is down by nearly 7% this morning after investors learn news that China is deepening an anti-trust investigation for Korean chip makers Samsung, SK Hynix and our (the U.S.’s) very own, Micron. A report in the Financial Times says Chinese investigators claim they’ve found evidence of antitrust violations and are examining the business transactions. The companies claim they’ve played everything by the book.
Meanwhile, Nomura analyst Romit Shah says there are other reasons for doubt when it comes to Micron. Though the analyst is overall bullish, he notes estimates have been too high for the current quarter and for the fiscal year ahead. He says the weakness seems priced in with the stock trading at 1.2x for the next twelve months with an estimated book value of $32.
Shah reiterates a Buy rating for the stock, with a price target of $50, which shows an upside of around 27%. (To watch Shah’s track record, click here)
The analyst, though bullish, says he believes the company could miss guidance this quarter due to lower bit growth or weaker DRAM ASPs. The analyst goes on to note he believes DRAM industry pricing is tracking down 10% in C4Q and will likely decline 15% in C1Q19. He also notes he believes server is the weakest, tracking down over 30% to $230-240 per 32GB in 1Q. DRAM spot pricing has weakened significantly since Micron last reported, and price declines seem to be accelerating, which reflect what Shah predicted.
“Micron has traditionally sold DRAM products at a slight premium to its Korean competition: we calculate an average DRAM ASP premium of 8-9% over both Samsung and Hynix since 2014. As a result, Micron may be subject to more meaningful price declines in order to maintain bit supply growth consistent with the industry,” Shah opined.
Due to the lagging DRAM outlook, Shah lowers his F1Q19 revenue from $8.1 billion to $7.9 billion and his EPS estimate of $2.95 to $2.78. The analyst also lowers his full-year estimates for 2019 from $31.7 billion in revenue to $28.9 billion and EPS from $11.20 to $9.10.
On the bright side, Shah says Micron is doing significantly better than during its last downcycle in 2015/2016. He notes the company has successfully ramped 1Xnm DRAM, resulting in the smallest profitability gap in DRAM versus Samsung in the last decade.
“Further, though already reflected in book value, the management team has de-levered Micron’s balance sheet, opening up cash to further narrow the technology gap vs. Korea and execute on its $10 billion buyback authorization. Finally, we believe Samsung’s decision to delay expansion at its Pyeongtaek facility to 2020 was an important one and indicative of its willingness to curtail production to maintain high levels of profitability and prevent a DRAM price war,” Shah concludes.
Overall, most analysts on Wall Streets are out rooting for this chip titan to be a winning stock pick, as TipRanks analytics showcase MU as a Strong Buy. Based on 24 analysts polled in the last 3 months, 16 rate a Buy on Micron stock while 8 issue a Hold. The 12-month average price target stands at $62.87, marking a nearly 70% upside from where the stock is currently trading.