Micron Technology, Inc. (MU): Bulls Weigh In on the Bigger Picture

Three Wall Street voices believe there is more excitement to Micron's story than a pre-announcement.

All eyes are peeled to see if Micron Technology, Inc. (NASDAQ:MU) is set to pre-announce ahead of its expected fiscal fourth quarter print due September 26th. Analysts are all chiming in, from Cowen to Morgan Stanley to Credit Suisse, with varying perspectives that all point in the same direction: full bullish steam ahead for the chip maker.

Could the company be set to pre-announce at “a competitor conference” today? Cowen analyst Karl Ackerman muses this is certainly possible, especially taking under account Citigroup’s worldwide tech conference on Wednesday.

However, “as the magnitude of (potential) upside is a bit less than prior quarters,” the prediction for a pre-announcement is not quite so set in stone.

Regardless of timing for the release of the chip maker’s financial results, the analyst believes the fourth fiscal quarter will reflect DRAM and NAND pricing “momentum,” and as such, he is angling for a 10c beat over consensus of $1.82 per share.

Therefore, ahead of the print, the analyst reiterates an Outperform rating on MU stock with a $40 price target, which represents a just under 25% increase from where the shares last closed.

Ackerman explains, “We acknowledge that upward estimate revisions may prove more challenging now that Street has finally caught up to MU’s earnings power. We still see an opportunity for a beat and raise when MU reports later this month, however, as DRAM spot pricing for leading (commodity) DDR4 modules is still 5-10% above contract values and MLC NAND spot pricing also continues to exceed contract. Ergo, there is momentum behind pricing from the suppliers that could tilt the bias toward flat to up pricing in DRAM and NAND that would be much better than our current DRAM ASP assumption of -4% Q/ Q and NAND ASP assumption of -3% Q/Q (we’re a nickel above Street).”

While Ackerman would not be surprised to see PC demand lag behind seasonal expectations, and though he acknowledges stiff smartphone ASPs all with a “battle brewing” to capture new server sockets over rivals Samsung and Hynix, he remains steadfast in Micron’s corner. With fresh server platforms from Intel and AMD anticipated to drive demand, this will only bode well for the chip maker.

“But we would be surprised to see a strong negative reaction from investors as this has been well telegraphed by the company even last Q,” adds the analyst.

While the chip maker “guides” fairly “conservatively,” it is “not enough to pre-announce,” wagers Morgan Stanley analyst Joseph Moore.

However, is this a factor that should detract from Micron’s story? Not by a long shot, says Moore, who believes that “For Micron, the wall of worry is more intense” than its chip making rivals, “given potential for further upward revisions to both micron spending and industry spending in 2018.”

In fact, considering shares are trading at around 4 times the present EPS run rate, “we still see the stock moving higher,” predicts the analyst, who maintains an Overweight rating on MU with a $36 price target, which implies a 12% increase from where the shares last closed. (To watch Moore’s track record, click here)

In terms of capital spending, the chip maker “has surpassed our most bullish expectations coming into the year,” Moore notes; yet, some variables could narrow the immediate effect that those expense investments could yield upon supply growth.

“Management hasn’t yet commented, but several factors lead us to believe that the number could be quite high vs. the $5.2 billion this year:

The MU team has not indicated that spending could soar meaningfully up in fiscal 2018, but Moore anticipated this situation is forthcoming for the chip maker for the following reasons: “1) EBITDA run rate of $13 bn at the midpoint of guidance for 4q, which has tended to have predictive value; 2) New CEO Sanjay Mehrotra’s comments on the call that his biggest strategic priority will be ‘execution and competitiveness … particularly accelerating the launch of new technologies into volume production’; and 3) multiple cautions that the 30% of revenue long term target for capital spending is a long term number, and spending will be driven by near term requirements. To be clear, they did not give any direct color, but that combination has us at least aware that spending could be higher.”

On back of Micron’s fiscal third quarter results, the analyst boosted his expectations to $6.5 billion for spending. Down the line, Moore sees rises in spending as a positive for Micron, potentially bettering its “relative cost position through cycles;” however, “it would limit cash flow.”

Credit Suisse analyst John Pitzer echoes the bulls on the Street, finding that pre-announcement or not waiting in the wings from the chip maker, this is the least important corner of the bigger picture.

“Speculating on a positive-preannouncement (unlikely in our opinion) completely misses the point,” argues Pitzer, who reiterates an Outperform rating on MU with a price target of $40, which represents a close to 25% increase from where the shares last closed.

Pitzer explains that what matters more is that the stock is trading at “~4x times FTM EPS because investors do not believe in sustainability, especially with upside bias to industry CapEx.”

As far as the analyst assesses Micron’s model for business, the compass “continues to point to a ‘Stronger-For-Longer’” boiling this reasoning down to three key points: “Capital intensity for both DRAM/NAND ~15-20% structurally higher” when juxtaposed against prior capital intensity; “DRAM CapEx-to-Rev of ~20% vs. peak of ~50%, still relatively cyclically safe”; “3D NAND yields progressing well, limiting risk of ‘phantom supply’; and “new applications – SSDs for NAND, AI/Acceleration for DRAM.”

Ultimately, the Street is underappreciating this compelling stock, as Pitzer concludes, “While we acknowledge the historic cyclicality and are worried tactically that many expect MU to pos-pre this week, we continue to see memory in general and MU specifically as the most structurally undervalued asset in semis – Lastly, we would highlight even assuming a CY15 like downturn, at today’s cost structure MU’s trough EPS/FCFPS would be a POSTIVE $3.00/$2.00 respectively vs. annualized NEGATIVE ~$0.15/~$4.00, respectively in FY16.”

How do these bulls weigh up against the word of the Street? Astutely, it seems, considering TipRanks analytics exhibit MU as a Strong Buy. Out of 19 analysts polled by TipRanks in the last 3 months, 17 are bullish on Micron stock while 2 remain sidelined. With a return potential of 31%, the stock’s consensus target price stands at $42.14.

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