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Is Micron (MU) Stock a Buy? Deutsche Bank Says Yes

support@smarteranalyst.com (Ben Mahaney)

Last week, Micron (MU) released second-quarter financials, which despite showing (expected) poor performance, pushed the stock price nearly 10% higher in next-day trading. While revenue and EPS both plummeted — 20.5% and 39.4%, respectively — investors seemed to have expected worse, as a deteriorating chips market and collapse in NAND and DRAM prices has had a severe negative effect on industry players and therefore investor sentiment. But after losing more than 50% of its value between its high and low in 2018, Micron’s stock is back up nearly 40% since the end of the year.

Deutsche Bank analyst Sidney Ho expects this ride to continue, as he maintains a Buy rating on MU stock with a $48 price target, which implies nearly 23% upside from current levels. (To watch Ho's track record, click here)

Even though the stock is up big, by no means is Micron out of the water just yet — and the chip giant made sure investors knew this. Guidance set by the company is weak, but this “was mostly anticipated by investors,” says Ho. Though the analyst is surprised by Micron’s “decision to lower wafer starts and capex,” the move “should help the industry return to supply-demand balance sooner.”

Coming out of the earnings release, Ho also liked Micron’s continued confidence in a second-half recovery, “highlighting that it is seeing some signs of better inventory levels at customers…” Furthermore, the analyst says, “technology transitions in both DRAM and NAND appear to be on track, and the company reiterated that it expects to see healthy cost declines in CY19.”

One of the main culprits in last cycle’s collapse was high inventory levels, which led to decreasing average selling prices. The analyst notes, “inventory ended the quarter at $4.4b or 134 days, up ~$500m or 27 days q/ q, and the company expects inventory to move higher in F3Q.” But even as inventory moves higher, Ho says “memory suppliers are demonstrating more discipline in this cycle,” which should help improve conditions, while also mitigating damage for the next contraction.

While inventory control is important — and something in the hands of Micron — Ho says, “the company is relying on stronger demand in 2H19 to reduce DRAM inventory,” though expects “higher NAND inventory levels [to] remain into CY20 as MU holds extra inventory while it goes through a technology transition.” Furthermore, while Micron is relying on demand, the analyst believes “industry demand appeared to be worse than expected,” but with little visibility in the short-term, Ho concludes “it is difficult to have too much conviction that the current quarter will be the trough of this cycle, although we believe it is unlikely to see significant downward revisions from the current level.”

All in all, investors were expecting poor numbers from Micron, but were pleasantly surprised by the release. The company isn’t out of the waters just yet, but seem to be making positive steps forward. TipRanks analysis of 27 analyst ratings generally agree with this assessment. The analysis shows a Moderate Buy rating, with 16 analysts recommending Buy, nine saying Hold, while only two suggesting Sell. The average price target currently stands at $46.75, which represents about 20% discount to current trading levels. (See MU's price targets and analyst ratings on TipRanks)

 

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