Demand for DRAM chips has been strong thanks to the explosive growth in hyperscale data centers, which created a shortage and causing prices to increase. Indeed, Micron’s (NASDAQ:MU) server revenue was up 30% sequentially last quarter thanks to the increasing adoption of this memory in data centers.
Based on higher assumptions for DRAM pricing, Stifel’s top analyst Kevin Cassidy increases his forward estimates for Micron. The analyst now estimates F3Q18 revenue and non-GAAP EPS of $7.5 billion/$2.90 compared to his previous estimates of $7.4 billion/$2.80. For FY2018 revenue and non-GAAP EPS, Cassidy is now estimates $29.4 billion/$11.08 compared to his previous estimates of $29.0 billion/$10.73.
Cassidy noted, “For the May-ending quarter, based on inSpectrum data, we estimate PC commodity DRAM contract prices increased ~6% q/q compared to the February-ending quarter. Over the same time period, we estimate mobile DRAM contract prices increased ~4% q/q. This compares to our previous estimate of a 2% q/q DRAM ASP decline for Micron’s F3Q18.”
However, NAND prices have started to reverse in 4Q17 and the analyst believes the market is giving trough valuations to Micron’s NAND Flash business due to concerns that prices will fall further.
Cassidy calms investors’ fears, noting, “Based on comparable companies that supply various types of memory, we believe NAND Flash revenues are sharply discounted. In our view however, Flash contract prices are tracking in line with cost reductions and moderate price declines are healthy for the broader industry, generating increased demand for more price sensitive consumer applications such as PC adoption of SSDs to replace HDDs and increased mobile handset content.”
Net net, Cassidy reiterates a Buy rating on Micron shares, while slightly lifting the price target from $95 to $101, which represents a potential upside of 79% from where the stock is currently trading.
According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, 5-star analyst Kevin Cassidy has a yearly average return of 24.9% and a 74% success rate. Cassidy has a 51.4% average return when recommending MU, and is ranked #48 out of 4800 analysts.