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The Risk-Reward Ratio of Micron Stock Looks Favorable, Says Analyst

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Computer memory stocks are known to be heavily cyclical, subject to the whims of supply and demand dynamics. Recent times have seen these stocks come under pressure as investors have pondered whether we are at the peak of such a cycle. Shares of memory giant Micron (MU) have borne the brunt of this perceived market development and over the past 6 months have shed 22% of their value.

While memory supply chain checks conducted by Deutsche Bank’s Sidney Ho suggest that in the near-term demand remains strong with suppliers finding it hard to “keep up,” the analyst concedes that given the memory market’s historically cyclical nature, investors are “taking a more bearish view,” concerned with how the strong DRAM capex this year will affect industry supply next year.

Ho also notes that in the server market there is general agreement that demand currently remains robust. However, opinions diverge when the talk turns to the outlook, specifically regradinghow much inventory is in the supply chain and hence their outlook for memory pricing.”

On the demand side, delays in Q3 price negotiations suggest some large cloud customers have already built up enough inventory, indicating pricing rather than availability is more of an issue. While Q3 price negotiations are ongoing, sellers on the other hand have pointed out that memory components’ prices are still up by 5-10% quarter-over-quarter, implying inventory levels at those customers are “unlikely to be too high.”

“The divergence in view has led to a wide range of ASP expectations for 4Q,” says Ho, “With the more bullish view suggesting server DRAM prices could be up ~5% q/q, while the more bearish view suggesting prices could be down 5-10% q/q.”

While Ho also notes that there seems to be widespread agreementthat the supply-demand balance would improve in the second half of next year - making for a favorable CY22 set up - his view is that “increasing uncertainty around DRAM prices in the near term will likely continue to pressure valuation multiples.”

For Micron specifically, this means a “lowering of DRAM pricing assumptions” and with it a price target reduction for the stock. The figure drops from $110 to $95, yet still suggests upside of ~29%. Despite the target slash, given the recent underperformance in share price, the risk/reward “remains favorable” and Ho’s Buy rating stays as is. (To watch Ho’s track record, click here)

Most on the Street agree MU stock remains a Buy. 16 out of 22 recent reviews are positive, with the other 6 remaining on the fence with a Hold rating - all coalescing to a Moderate Buy consensus rating. The average price target remains a bullish one; at $111.69, the figure implies share appreciation of ~52% in the year ahead. (See Micron stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.