Micron Technology, Inc. (MU) Is Facing a Rocky Short-Term, But This Bull Analyst Bets on A Lot of Free Cash Flow Ahead

Nomura's Romit Shah warns of volatility ahead, but says any pullback is a great opportunity to buy into this money maker chip giant.


How is Micron Technology, Inc. (NASDAQ:MU) set to fare in the lately “volatile” world of chip makers? Shares may face some volatility in the near-term, warns one bull, but “any weakness” is good news for those smart enough to take the investment gamble.

Nomura analyst Romit Shah understands that with an MU management team that has not made a habit of commenting on “forward pricing,” it seems the chip giant “is thus unlikely to assuage concerns about NAND oversupply in 1H-18.” Recently, NAND flash memory pricing fears have been tearing through the market, nipping at the heels of other semiconductor players like Analag, Applied Materials, Broadcom, Nvidia, and Western Digital (which faced a downgrade from Morgan Stanley). In other words, “semiconductor stocks haven’t been rewarded for good news over the last month.”

As the tech player gears up to post its first fiscal quarter earnings for 2018 tomorrow after the bell, Shah cannot help fearing China could hurt the company in the second fiscal quarter. Pointing to yet a third reason this chip giant could confront volatility, the analyst predicts: “Weakness in China smartphones might temper sequential revenue growth in the FebQ (consensus -3.5%).”

Keep in mind, “Micron was able to weather this storm in April/May 2017, but pre-builds for iPhone X and the Purley server platform will be less of an offset heading into the seasonally weaker FebQ,” continues the analyst.

However, Shah is remaining bullish on the tech stock, noting he expects “decent upside to consensus” even as he looks for “shares to be volatile in the short term.”

In tracking the movement of Micron’s operating margin throughout a period of the last five years, the analyst pinpoints a robust correction between the price-to-book multiple and the giant’s share price. “Micron is currently trading at 2.3x trailing book, which implies that shares are pricing in ~20% operating margins, significantly below our FY18 estimate of 41.3%. We see this discrepancy as room for the multiple to expand. Furthermore, we expect Micron to generate substantial free cash flow in the coming quarters, resulting in a much stronger balance sheet. This should help support the multiple,” asserts Shah, anticipating this company stands as a real money maker.

Shah projects that free cash flow will rise from $1.7 billion in the fourth fiscal quarter to $1.9 billion in the first fiscal quarter, waning a tad in the fiscal quarter. With better free cash flow, the analyst sees a stronger net debt position from $5.1 billion, or $4.29 per share in the fourth fiscal quarter to $3.2 billion in the first fiscal quarter, or $2.65 per share. By the second fiscal quarter, the analyst looks for $1.4 billion, or $1.16 per share.

For the first fiscal quarter, the analyst looks for Micron to bring $6.452 billion in revenue to the table coupled with $2.21 per share in net income, which would beat out consensus of $6.41 billion and $2.19 per share.

The analyst maintains a Buy rating on MU stock with a price target of $50, which implies a nearly 16% upside from current levels. (To watch Shah’s track record, click here)

TipRanks sides with the bulls on Micron, with 21 of 23 analysts in the last 3 months rating a Buy on the stock and just 2 maintaining a Hold. With a solid return potential of 27%, the stock’s consensus target price stands at $53.86.

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