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Why Micron (MU) Stock Could Continue Its Rally

Micron (MU) shares have surged over 37% during the past month, as investors are increasingly optimistic that the chip giant is finding its way out of trouble. For one, the US-China tensions seem to be cooling, which is especially important to Micron has it generates half of revenue from China. DRAM prices are also inching higher, spurred in part by another trade dispute between Japan and South Korea. As memory prices are expected to eventually rise, this will spur Micron revenue (and stock).

So how much higher can Micron stock go? RBC Capital analyst Mitch Steves maintains his Outperform rating and $55 price target, which implies nearly 17% upside from current levels. (To watch Steves' track record, click here)

Pricing remains a main concern for Micron and its investors. However, global market research firm DRAMeXchange has revealed that DRAM pricing has increased in the past two weeks. As a result, Steves believes Micron will raise prices,” which “are a solid indicator for Micron's future stock price as well.”

Steves also looks at the DXI, DRAMeXchange’s index, which is calculated by multiplying the mainstream DRAM chips with their respective spot prices. The analyst says there is a strong correlation between Micron’s stock and the index, as Micron generates about 66% from DRAM sales. As the DXI has risen over the past few weeks, Steves sees the stock following suit.

Aside from the index, Steves says the potential for a supply/demand constraint in 2020 is becoming more likely. The analyst points out that “this were to occur, after memory moves up we would look for a semi-cap equipment demand change as well “ but that it is “quite difficult to look out 18 months.”

Though the analyst is bullish on Micron, he doesn’t think that things are all clear. Steves must see 1) clear signs of data center spend, and 2) clear signs of normal smartphone demand before we see the stock re-rating higher.” So far, “only TSMC (Taiwan Semiconductor Manufacturing Company) has confirmed this view.”

All in all, after a weak Q2, Wall Street thinks things are turning around for Micron. As the US-China tensions ease and pricing is expected to increase, the signs are pointing in the right direction. TipRanks analysis of 22 analyst ratings shows a Moderate Buy rating, with 12 analysts recommending Buy, six saying Hold and four suggesting Sell. As Micron’s stock has risen over 10% in July, some analysts have not yet updated their price targets, as reflected by a lower-than-market average price target of $43.95.
(See MU's price targets and analyst ratings on TipRanks)