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MKM Continues to Recommend Micron (MU) Stock; Here’s Why

Micron (MU) got some upbeat commentary from MKM analyst Ruben Roy. Though much of the narrative ties to DRAM pricing trends, some important insights tied to the DRAM industry is expected to come out in the form of SK Hynix and Samsung reporting results on April 24th and 27th, respectively.

Roy noted, “We continue to recommend MU shares following recent industry and supply chain data points which suggest that the memory market participants continue to actively navigate a challenging demand environment by managing supply side inputs. While the slope of a potential recovery in the second half of this year remains difficult to assess, we believe that profitability metrics are likely to bottom by the end of the first half of the calendar year. From a longer-term perspective, we continue to remain positive on the memory sector given that content is likely to increase as emerging applications such as AI, autonomous driving, machine learning, and data analytics/data science continue to evolve. For MU specifically, as competitive technology gaps narrow, we expect market share gains, longer-term. Our 12-month price target of $50 is based on a 9x multiple on our C2020 EPS estimate.”

Roy reiterates a Buy rating on Micron stock, with a $50 price target, which implies nearly 16% upside from current levels. (To watch Roy’s track record, click here)

The stock has consistently trended higher since bottoming out at around $30 in January. Since March 20th, earnings announcement, the stock has been range bound between $37 to $43 in the month of April. The follow-on of earnings results from semiconductor peers and the reported results tied to other parts of the memory supply chain might help with sentiment tied to the sector. This could add some upside to the stock, but mostly on multiple expansion until earnings results improve on better DRAM and NAND pricing.

The supply glut can be owed to the fact that a number of end-markets have performed less desirably. PC shipments declined by 4.6% in Q1’19, according to Gartner and IDC. Whereas IDC also anticipates a 0.8% decline in smartphone shipments in 2019. Hence, scaling back memory supply makes a lot of sense in this environment, which is what investors in Micron are anticipating across the entire memory supply chain.

The long-term narrative still makes sense for memory, because it’s bound to recover given the efforts by industry participants to cutback on spending. Nanya Technology cutback on capex by 34% in 2019 whereas ASML reported lithography spend for memory would be lower by 30% in 2019 versus 2018.

The price of memory may have finally found a base at $0.66 in Q1’19 versus pricing of $0.67 in Q4’18. It was also noted that the average GB of memory in laptops was 12.8 GB in Q1’19, which was driven by the drop-off in pricing for memory. Pricing remained flat over the prior two-quarters, which implies that pricing is at least stabilizing in the DRAM segment whereas SSD pricing could continue to trend lower.

If pricing does stabilize, we will likely see more announcements in the way of production cuts. Samsung and SK Hynix have already reported that they will no longer open new facilities tied to flash memory difficulties. However, to move the needle even further, both Samsung and SK Hynix would need to cut output from its pre-existing facilities, which they might announce during Q1’ earnings season. Micron, Samsung and SK Hynix account for 96% of the global memory market. Micron has already announced that they would cut production by 5% in both memory and NAND in 2019. For the market to rebalance, both Samsung and SK Hynix would need to cut production by similar amount, which would signal an end to the recent pricing declines for memory.

All in all, sentiment tied to Micron has trended higher, as more analysts pile onto the stock in anticipation of what will be a turnaround in pricing, though much of that is dependent on the willingness of other suppliers cutting back on production.

When looking at Wall Street’s stance, Roy is not the only bull, as TipRanks analytics showcase MU as a Buy. Out of 26 analysts polled in the last 3 months, 13 rate Micron stock a Buy, 10 maintain Hold, and 3 recommend Sell. The 12-month average price target stands at $53.89 marking nearly 25% upside from where the stock is currently trading. (See MU’s price targets and analyst ratings on TipRanks)


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