Coming off a disaster 2018, Micron (MU) stock appears to be making a comeback. But this isn’t necessarily unexpected — Micron’s fall in 2018 was largely not their own fault, but a result of cyclical industry dynamics where oversupply and lower demand contributed to industry-wide lower selling prices and therefore revenue. In short, many expected the downturn to come (perhaps not as strongly as it did) and, naturally, also expect the industry to rebound.
However, while Micron and the industry are both showing signs of life, Morgan Stanley analyst Joseph Moore has taken a big step backwards, downgrading MU stock to Underweight (from Equal-Weight) with a $32 price target, citing the stock’s 30% rally since January. (To watch Moore’s track record, click here)
While the analyst does believe ”optimism [around] cloud demand” is real, he still sees “DRAM remaining oversupplied throughout the year and into next…[with] NAND is closer to a bottom than DRAM.” As a result, estimates for “FY20 are 58% below consensus and we think there is higher likelihood of downside vs.upside to our numbers.”
Inventory remains a major hurdle for Micron. Moore says “inventory climbing to 150 days (vs prior 25-year highs around 115 or so) by mid year is a significant negative…[as[ current inventory is future supply and where there is excess supply, prices and margins go down.” But bluntly, Moore says, “it should be axiomatic when investing in a commodity that producer inventory is supply that has a negative impact on pricing.”
Now, with that said, Moore does believe “demand snaps back in 2h,” but it won’t be “enough to keep inventory from building during a period of seasonal strength, which is likely to be very bad for pricing and margins.” And he cautions the “snapback..[won’t be} as strong as some think,” and it will take more time before the industry is stable.
Most of the Street is far more confident than Moore’s bearish stance, with TipRanks analytics showcasing MU as a Buy. Based on 25 analysts polled in the last 3 months, 14 rate a Buy on Micron stock, while 8 issue Hold and 3 recommend Sell. The 12-month average price target stands at $46.50, marking a nearly 11% upside from where the stock is currently trading. (See MU’s price targets and analyst ratings on TipRanks)
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