With Micron (MU) having surged more than 30% in just the past two months, the question might be what comes next. In the words of The Clash, “should I stay or should I go?”
Well, it isn’t too clear. Shares rose steadily in the first four months of the year, with many investors thinking (and hoping) the chip market recovery was in full-force. But then MU plummeted in May, reigniting fears that the stock is not ready just yet. Fast-forward to the present, and the trends point to optimism in the market, with Micron management recently saying that demand is returning.
5-star RBC analyst Mitch Steves sees the green in Micron, as he maintains an Outperform rating and $55 price target, which implies about 27% upside from the current share price.
The semiconductor market has been choppy over the past year, but Steves sees the light and is raising his estimates. In fact, while the analyst’s updated EPS estimate of $0.60 for the August quarter is higher than guidance, he “wouldn’t be surprised to see numbers ahead” of his figures. Nevertheless, however, Steves sees Micron EPS bottoming in this quarter or next, and believes investors will apply higher multiples on these trough earnings, pushing the stock higher.
One major catalyst for Micron is the potential for a supply/demand constraint in 2020, as the Japan-South Korea trade dispute rages on. The tensions between the two countries are making it harder for South Korean companies to competitively sell DRAM and NAND. For example, the second-largest DRAM supplier, Hynix, recently cut both DRAM and NAND production, with Samsung expected to follow. As output from these two decreases, industry prices are expected to increase with more demand flowing to Micron.
Overall, Steves is increasingly optimistic on Micron, and believes there is the “potential” for FY20 EPS to top his estimate of $3.77, going as high as $5.00. Pricing remains a crucial factor, but the analyst believes NAND pricing will only increase from here, while DRAM should move higher next year. Nevertheless, Steves says he needs to see “clear signs of data center spend and…signs of normal smartphone demand before [he sees] the stock re-rating higher.”
It appears consensus sentiment matches well with Steves’ eager chip eyes, with TipRanks analytics showing MU as a Moderate Buy. Based on 21 analysts polled in the last 3 months, 13 are bullish on Micron stock, 6 remain sidelined, while only two are bearish. The 12-month average price target stands at $46.95, marking an 8% upside from where the stock is currently trading. (See MU’s price targets and analyst ratings on TipRanks)