It takes a lot of faith to elevate a risky company like Micron Technology, which makes memory chips, just hours before an earnings release.
But that’s exactly what BMO Capital Markets’ Ambrish Srivastava did this morning, upgrading Micron (ticker: MU) from Market Perform to Outperform and raising his target price to $110 from $90. The heart of Srivastava’s argument, according to a research note, is that he expects a continued limited memory-chip supply scenario until calendar 2022, owing to a combination of supply dynamics, capital investment discipline, and strong demand drivers.
The analyst clarifies that this is not a call on the upcoming quarterly earnings report, although the timing certainly adds to the upgrade’s appeal.
Micron’s stock has been fluctuating in recent months, with the focus on demand and pricing dynamics in memory chips, particularly DRAM, which accounts for over 70% of Micron’s sales, with NAND flash memory accounting for the majority of the rest.
Micron had forecasted revenue of $6.9 billion to $7.3 billion for the quarter ending in May. Late last month, CEO Sanjay Mehrotra told investors at a virtual J.P. Morgan investment conference that the total would be at or above the high end of the range, and that non-GAAP gross margin and earnings per share would likely be strong. The Guidential Directive had requested $1.62 in non-GAAP earnings per share, giving or collecting 7 cents, with a non-GAAP profit margin of 41.5%; Street consensus demands an income and profit of $7.23 billion of $1.71.
Micron stock has underperformed the whole semiconductor group year to date, according to Srivastava, with a 10% gain vs a 20% gain for the industry. He says, “We believe there is a fair bit of anxiety about near-term pricing, driven by inventory digestion in phones in China and an eventual slowdown in PCs, as well as uncertainty surrounding the cycle’s endurance in general.” “While some of your fears are fair, we envisage a very different scenario farther down the road. In 2022, we predict a supply-demand imbalance in the DRAM business as well. This mismatch is being driven by dynamics on both the supply and demand sides.”