With Micron's (MU) second-quarter results slated for announcement Wednesday after close, investors are eager to see how depressed average selling prices (ASPs) are impacting the semiconductor giant. While the company was flying high last year, the climate around memory chips has taken a turn for the worse, sending the stock down about 34% since. Lower demand with high supply has pushed prices downwards, which has pushed revenue and expectations down, with its stock price following.
While some analysts expect a price turnaround soon, Susquehanna analyst Mehdi Hosseini says this will not be enough. The analyst maintains a Neutral rating on MU stock with $35 price target, which implies nearly 12% downside from the stock. (To watch Hosseini's track record, click here)
Wall Street is well aware that ASPs have declined worse-than-expected in the quarter, Hosseini says. But the analyst concedes “what is not well understood and not dialed into the share price is [gross margin] trends given the flattening of the cost curve, elevated inventories and lack visibility on mix impact from the higher margin segments.” Elevated inventories is especially important and has been highly discussed in the industry, as this has contributed to lower prices and demand from downstream buyers.
Within the industry itself, Hosseini says, “there have certainly been (positive) structural changes within the memory industry (i.e. consolidation, increased Enterprise/Cloud demand)...but...cost curves for both DRAM and NAND have moderated (as capital intensity increased) while there is nearly a full quarter of inventory (on manufacturers' books),” which contribute to lower selling prices.
Looking at capital expenditures, the analysts “argue[s] 2019 cap-ex cuts are not yet deep enough to lead to shortages by YE19, and ASP increases in 2020,” while on the demand side, “Server DRAM demand is not expected to accelerate until some time in 2020, while Enterprise NVMe is pretty much dominated by Samsung and Intel.”
Server and Enterprise segments “offer the highest margins for DRAM and NAND”, but the Hosseini “simply lack[s] [the] confidence around their contribution to MU's earnings looking into 2020. Thus, the above (flattening cost, bloated inventories, lack of confidence on ASP increases into 2020, and shipment mix) are a material overhang on margin expansion and we believe this would limit the EPS rebound.”
All in all, the chips market goes through cycles, which means any significant short-term decline doesn’t necessarily scare investors away. Events that individual companies cannot control may force share prices down, but many investors do not see these trends in holding in the long-term.
Wall Street almost evenly split between the bulls and those choosing to play it safe. Based on 20 analysts polled in the last 3 months, 11 rate a Buy on Micron stock, while 7 maintain a Hold. Notably, the 12-month average price target stands at $47, marking a nearly 17% in return potential for the stock. In other words, even the analysts that are hedging their bets have some healthy optimism reflected in expectations. (See MU's price targets and analyst ratings on TipRanks)