The memory chips industry is a classic example of supply and demand economics — as there is a greater distance between products demanded and products produced, prices generally drop. This phenomenon couldn’t be more clear today for chipmaker Micron (MU).
Micron is among the largest players in the industry and has felt the effects of a worsening macro climate surrounding semiconductors and memory chips. An analysis by DRAMeXchange estimates that DRAM contract prices will decrease 30% in the first quarter, as inventory levels remain high. Higher inventory has contributed to lower demand by downstream buyers, resulting in a plummeting price for DRAM and, consequently, a near-40% drop in Micron’s stock since July of last year.
Yet, MU stock is up nearly 20% YTD, leaving many investors scratching their heads trying to figure out what to do next. UBS analyst Timothy Arcuri, for example, remains sidelined on the stock, with a Neutral rating and $38 price target, which implies a slight downside from current levels.
On DRAM average selling prices (ASP), Arcuri says data suggesting a 30% decline is “a scary number to be sure.” But that isn’t making the analyst negative on the stock. He argues that “the month of [December] was good enough that MU should still avoid a negative pre-announcement for FQ2:19 (Feb) assuming bits are not down >10% Q/Q.” So while prices are down big, Arcuri says there other factors to consider before pulling the plug on the stock.
Moving forward, Arcuri thinks Micron will “likely cuts capex again, but if not, FCF could also approach breakeven during this period.” The analyst has “long felt that investors have been well ahead of sell side estimate cuts here and this remains true, but this cyclical beta rally in semis has carried MU back to ~1.35-1.4x TBV – a multiple rich enough to leave some risk if/when MU indeed approaches breakeven.” Overall, Arcuri says he is “not super negative, but [feels] it is simply too early to believe MU stock is off to the races if TTM FCF is not bottoming for another 12mos+.”
According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, Arcuri has a yearly average return of 24% and a 67% success rate. Arcuri has an average return of 67% when recommending Micron and is ranked #41 out of 5,218 analysts.
All in all, Micron participates in an industry that has notable ebbs and flows. But because of this, any significant decline doesn’t worry investors too much, as much of the fall could be attributed to macro events that are out of Micron’s control. TipRanks analysis of 23 analyst ratings shows a Moderate Buy rating, with 16 analysts recommending Buy, six saying Hold and one Sell. The average price target of $50.76 represents about 30% upside from current levels. (Get TipRanks’ free stock analysis report on AMD)