After a recent slew of upgrades, it’s clear that Goldman Sachs is bullish on semiconductor stocks. On July 21, Toshiya Hari upgraded Applied Materials (AMAT) and Lam Research (LRCX) to a Buy rating. The next day, Mark Delaney upgraded the leading DRAM and NAND semiconductor manufacturer, Micron Technology Inc. (MU), to a Buy. He raised his price target from $40 to $56, suggesting 20% upside potential.
Following the news, Micron's share price rose by almost 4%. The combination of the upgrade and positive memory chip industry trends have some of the top analysts convinced that MU is a compelling investment.
Should investors also take a bullish stance on MU?
Falling Chip Inventory Levels Help MU
Over the last few months, share prices took a hit as a result of DRAM and NAND oversupply, which drove the chip demand and prices down. Delaney points to the June power outage at Toshiba Memory Corporation, which caused a drop in production, to support his belief that the chip supply will continue to decline.
Goldman Sachs' original estimates didn’t have supply and demand for chips improving until at least 2020.
“We now believe that inventory at the memory companies ... is being depleted faster than we previously expected. The computer memory maker responded logically to the decline in demand by downshifting their production rates. As the rate of production of new memory decelerates, we forecast that production will ultimately fall below longer-term demand growth in 2020, transforming a market characterized by oversupply into one characterized by undersupply,” said Delaney.
If this occurs, the analyst expects memory prices to spike as buyers face-off to get a hold of a limited supply.
He notes that industry research suggests NAND pricing could start to improve from low levels in Q3 of 2019. This is essential for MU as 25% of its revenue is generated from trade NAND chips.
Delaney does warn investors that while he believes a recovery is coming, the effects might not be felt for some time. He thinks MU’s full-year 2020 EPS will fall below Wall Street's expectations. However, the analyst expects full-year 2021 EPS to be 30% above consensus estimates.
Japan-South Korea Trade War is Good for Business
On July 1, Japan put restrictions on South Korean chemical materials exports that are necessary to produce semiconductors. The official statement said that the decision was based on national security concerns as South Korean companies failed to manage the chemicals properly, with some ending up in North Korea. The claim was vehemently disputed by South Korean officials.
Many investors are excited by this development, as a trade war would likely reduce the oversupply of chips, and thus benefit MU.
Q3 2019 Results Exceeded Expectations
Some investors were concerned that the company’s business relationship with Huawei and weaker price points for some of its chips would affect third quarter results. While its Q3 2019 quarterly revenue represents a 39% year-over-year decline, the company’s revenue and adjusted EPS beat the Street’s estimates. It reported revenue of $4.8 billion on June 25, surpassing the $4.7 billion forecasted by analysts. EPS was $1.05, exceeding the analysts’ expectations of $0.79 per share.
CFO David Zinsner said, “Had the restrictions not been imposed, Micron would have come in at the high end of its revenue guidance.”
Luckily for MU, the trade war hasn’t accelerated further. If it had, the effects on revenue and earnings would have most likely been much more profound.
The company also increased the pricing of the DDR3 SDRAM 1600 MHZ from $68 to $80 and its Micron - 1100 2 TB 2.5 Solid State Drive from $240 to $540.
Other Analyst Opinions
Merrill Lynch analyst, Simon Woo, maintained his Buy rating and raised his price target from $45 to $60, suggesting 27% upside potential. “DRAM spot market price has rebounded firmly in recent days, which he attributes to chip supply shortage concerns in conjunction with disruption at Samsung and Hynix,” he said on July 18.
Another five-star analyst, Mitch Steves, reiterated his Buy rating on July 16. “While we admit that it is unclear whether the Korea/Japan dispute will be resolved, if SK Hynix and Samsung are forced to procure high-purity hydrogen fluoride from a new source, Micron may gain market share. In a mission-critical environment such as the data center, we think customers may choose to shift their spending to Micron,” the RBC Capital analyst said. Steves has an impressive 80% success rate and gets an average return of 23% per rating.
The Final Verdict
The Street is cautiously optimistic that MU is on the road to recovery. It has a ‘Moderate Buy’ analyst consensus and a $45 average price target, indicating downside potential of 4%.