With DRAM and NAND pricing trending downwards, the Huawei ban, and a questionable hyperscale rebound, Micron (MU) appears to be in a world of trouble ahead of earnings tonight.
However, some on the street still have faith in the chip giant after its recent drawdown. One of them is Vijay Rakesh, a senior research analyst at Mizuho.
Ahead of the print, Rakesh maintains his Buy rating on MU stock, with a price target of $44, which implies over 30% upside from current levels. (To watch Rakesh’s track record, click here)
Weak demand for PCs and smartphones has negatively impacted demand for DRAM and NAND, with estimates from Gartner indicating that both devices experienced approximately a 5% drop in shipments in Q1 of 2019. When combined with the US administration’s ban on US technology companies supplying Huawei, it is easy to understand why the market has punished Micron’s stock over the last months. China is the world’s largest importer of memory products with an estimated consumption of over 20% of the global DRAM production. On the other hand, some are pointing to a data center hyperscale recovery that could help offset some of the demand challenges Micron is facing.
Rakesh “believe[s] MU lost ~2 weeks of revenue from Huawei driving ~$100M downside to the original $4.8B guide.” This ban directly hits Micron’s revenue due to the lost sales from selling products to Huawei, but it’s also contributing to reduced demand for DRAM and NAND, resulting in lower prices for Micron’s sales outside of China. The analyst forecasts that DRAM pricing “could be down another 15% [quarter over quarter] into September, with NAND down 5-7% [quarter over quarter].” Memory inventory at OEMs has been accumulating, indicating continued oversupply compared to weaker demand. However, Rakesh believes that a bottom could be near, as suppliers are shipping below their costs of production.
Rakesh has lowered his May quarter revenue forecast to $4.6B from $4.8B, and his EPS forecast has also been reduced from $0.85 to $0.73. In addition, The analyst expects Micron’s FCF to face headwinds throughout the remainder of 2019, but he believes CAPEX cuts of around 5% for both DRAM and NAND will soften the blow.
Rakesh is not the only fans of the chip maker on Wall Street, as TipRanks analytics exhibit MU as a Buy. Based on 20 analysts polled in the last 3 months, 11 rate a Buy on Micron stock while 5 maintain Hold and 3 recommend Sell. The 12-month average price target stands at $42.35, marking a 29% upside from where the stock is currently trading. (See MU’s price targets and analyst ratings on TipRanks)