After a disastrous end to 2018, where the market was flooded with too much supply and low demand, the chips market seems to be on the up and up. Though this isn’t unexpected — the market is historically cyclical — this past downturn was worse than in recent memory. But with pricing seeming to bottom out, many are expecting Micron (MU) to regain lost ground. And Micron’s stock price seems to be seconding this. Shares climbed as much as 32% before the recent flare-up of tension between the US and China.
Analyst Ambrish Srivastava of BMO isn’t too concerned with the geopolitical tension, as he maintains his Outperform rating and $50 price target on the stock. (To watch Srivastava’s track record, click here)
Srivastava says he sees Micron “as a structurally more profitable company in a structurally better DRAM industry, and [does not] see Micron burning through cash like in the cycles past.” The analyst believes the company is strong, while viewing the industry as in better shape than recent past.
While industry-level downturns will negatively impact even the best-operated company, Srivastava believes Micron still has control at the wheel. He says, “there are several puts and takes to spend for clean room space, for back-end, and for node migration…[which] is all within the purview of what the company thinks about bit growth for the industry.”
But while the analyst remains confident that Micron is digging itself out of trouble, he says inventory will “continue to rise in the near term which will be a headwind for working capital.” Higher inventory has plagued the industry over the past year, as lower demand has contributed to lower selling prices and revenue.
Like many in the industry, the analyst believes Micron is a second-half investment. It will take time for inventory levels to normalize, which will help contribute to higher selling prices. Furthermore, as tensions between the US and China ease (as many expect), this will give confidence to downstream buyers, which may also help spur demand.
All in all, while some argue Micron doesn’t have too much control over its own future because of industry trends, the argument could also be made that the company still has the power to control spending and inventory. That is the expectation moving forward, as Micron seems to have learned from mistakes of the recent downturn. As a result, and though the company still has some work left to do, analysts are bullish on its future.
MU has a cautiously optimistic Moderate Buy consensus rating from the Street. This breaks down into 13 ‘buy’, 9 ‘hold’ and 3 ‘sell’ ratings in the last three months. We can also see from TipRanks that the average analyst price target is $53.42 – 52% upside from the current share price. (See MU’s price targets and analyst ratings on TipRanks)