Micron (MU): Will DRAM Price Jumps Get Stifled by China’s Ministry of Commerce?

Top analyst Amit Daryanani at RBC Capital sheds some light on MU amid China's antitrust officials indicating apprehension over steep DRAM prices.

Top analyst Amit Daryanani at RBC Capital is out with a bullish research note on Micron Technology, Inc. (NASDAQ:MU) on the heels of China’s Ministry of Commerce holding meetings with the chip giant’s team regarding DRAM pricing. China’s antitrust officials have been rumored by Trendforce to have met with Micron with wariness circling steep DRAM prices.

For context, the rise of DRAM prices has likewise bumped up component expenses for the Chinese PC OEMS, thereby affecting profitability. Worthy of note, China stands as the biggest memory importer, taking a roughly 20% slice of total DRAM, underscores the analyst. As prices for PC DRAM products have seen a steady lift throughout the last quarters, these flying costs have applied heat on Chinese PC OEMs who have been challenged to keep up with component costs. Daryanani poses the following question: “Could China muscle DRAM prices down?”

Making a bullish case for Micron, the analyst writes: “Although, the ministry has held similar discussions with other producers as well, we note that the current trade tensions between the US and China might also impact these discussions with MU. Given the collective 95% + share of Samsung, SK Hynix and MU in the DRAM industry, and the low likelihood of Chinese supply coming up in the DRAM business, we don’t think these actions would result in a meaningful decline in DRAM prices and ultimately demand/supply forces would continue to govern the prices. However, to avoid regulatory pains producers might slow the price increases and longer term consider increasing capacities. We think these concerns should at least partially abate next year when incremental DRAM capacity comes on board. Net/net: We think in the long term the stock is on track for $8.00+ mid-cycle EPS enabling a price toward $80.”

Regardless, the analyst spotlights “levers beyond memory pricing” in MU’s corner, as the company looks for $3.0 billion of savings throughout the upcoming 2 to 3 years on back of better cost and bit/wafer, a transition to a stronger mix, as well as upgrades in the broader operational scheme. In a case where pricing slips 30% to 40%, the analyst argues MU ought to still bring $5 to $7 in EPS power to the table. Additionally, the analyst points out the latest $10 billion buyback plan utilizing 50% of free cash flow along with a $4.7 billion debt repayment and converts of $1.2 billion that likewise should bolster EPS gains for the company.

For the third fiscal quarter, the analyst angles for $7.76 billion in revenue from the chip giant along with $3.14 in EPS against the Street’s estimates of $7.74 billion in revenue and $3.12 in EPS. For full year fiscal 2018, Daryanani expects MU will deliver $29.9 billion in revenue and $11.47 in EPS compared to consensus of $29.8 billion and $11.51.

Amit Daryanani has a very good TipRanks score with an 86% success rate and a high ranking of #13 out of 4,810 analysts. Daryanani yields 27.3% in his annual returns. When recommending MU, Daryanani earns 10.8% in average profits on the stock.

TipRanks points to the bulls when it comes to this semiconductor leader’s prospects at play. Out of 24 analysts polled in the last 3 months, 20 rate a Buy on MU stock, 3 maintain a Hold, while 1 issues a Sell. The 12-month average price target notably stands at $76.65, marking 24% upside from where the stock is currently trading.

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