Top Analyst Sees Improving Conditions for Micron (MU), But the Stock Looks Fairly Valued

Average selling prices.

That has been the biggest story for Micron (MU) and other memory chips companies over the past few quarters, as DRAM and NAND (volatile and nonvolatile memory chips, respectively) have seen ASPs significantly drop. The industry is a clear case of supply/demand economics — as demand and supply create distance from each other, prices generally drop. In today’s climate, industry experts point to slowing sales and higher-than-normal customer inventory as why the industry has slowed — downstream customers not only are expressing lower demand (because of slower sales), but any demand they have may be accommodated by their own inventory.

But Mizuho Securities analyst Vijay Rakesh sees improving conditions as he reiterates a Buy rating on MU stock. However, Rakesh sees MU as close to fairly valued as he maintains a $45 price target. (To watch Rakesh’s track record, click here)

According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, Rakesh has a yearly average return of 21.5% and a 63% success rate. Rakesh has an average gain of 44.6% when rating MU and is ranked #68 out of 5,205 analysts.

Rakesh says that a “DRAM supply issue at one of the leading Korean OEMs is creating a supply constraint in 1H [2019],” which is positive news for Micron. The analyst says, “while data center (DC) and server demand remains slow, we believe…supply issues at a major competitor has resulted in MU gaining some DC hyperscale orders…We believe potential supply bottleneck could be a tailwind for MU and for tighter DRAM market supply.”

The analyst specifically points to inventory as a concern, saying, “what is going wrong in Memory is high inventory as memory OEM supplier inventory could climb further in 1Q19 offset by some inventory digestion at cloud customers.” Rakesh believes “continued strong profitability with cloud revenue CAGR of 10-50% and normalizing cloud capex into 1H19 could position for a 2H rebound with new INTC/AMD launches.” Furthermore, Rakesh says that “almost all OEMs have cut bit growth for 2019 to ~35%, and assuming some drawdown of inventory, actual bit production potentially lower than 35%.” Lower production may play a role in higher ASPs, as supply outstanding may decrease.

Micron participates in an industry that has notable ebbs and flows. So while the company’s stock plummeted in 2018, investors aren’t all that concerned about its long-term prospects. TipRanks analysis of 25 analyst ratings shows a Moderate Buy rating, with 17 analysts recommending Buy, seven saying Hold and one Selling. The average price target stands at $49.63, representing a 16% upside. (For more insights on MU, get a free research report)


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