Micron Technology, Inc. (NASDAQ:MU) Stock Has Strong Momentum
Micron Technology, Inc. (NASDAQ:MU) stock has been on a tear of late gaining more than 65% in the last six months compared to 12% gain in the NASDAQ in the same period. The bullish run in the stock price was triggered by a spate of good news, including improving fundamentals and demand supply economics in DRAM and NAND segments. The recent run in the stock has changed the market sentiment from an overwhelming bearish to a bullish one.
Micron stock had crashed by more than 70% from its peak in December 2014 before the current bull rally began. Despite the strong run up in the last six months, the stock still has momentum. There is a lot going in the favor of Micron stock. Expect a strong result when Micron reports its Q1 2017 earnings on Wednesday, after the market close.
Multiple Analysts Upgrade
The main factor going in favor of Micron is the improving fundamentals in DRAM and NAND segments. DRAM contributes around 60% of Micron’s revenue while NAND segment contributes around 31% of Micron’s revenues. The supply situation in the DRAM market has undergone a drastic change. At the beginning of the year there was a supply glut, but now many analysts expect supply to remain constrained. The change in the supply dynamics was accelerated by Samsung and SK Hynix, Micron Technology, Inc. (NASDAQ:MU)’s main competitors, shifting their focus from DRAM to NAND production.
On the other hand, the demand for DRAM has increased. In a recent conference, Micron CFO Ernie Maddock said that he expects DRAM supply to increase by 15%-20% while demand to increase by 20%-25% creating upward pressure on the price. The upward price movement is expected in both DRAM and NAND segments. To quote a report from Market Realist (1):
“Pacific Crest expects the contract price for DRAM 4GB (gigabyte) DDR3 to increase by more than 20% MoM (month-over-month) in December 2016. It expects contract price for NAND 128 GB TLC (triple level cell) to rise by around 6% MoM during the same period.”
The improving fundamentals have earned Micron multiple analysts upgrades. Citi Research came out with a report with a price target of $30, almost 50% upside from the current price. To quote Citi analyst Christopher Danely (2):
“Fundamentals of the DRAM industry are rapidly improving due to lower supply combined with stable to improving demand,”, “In addition, Micron is improving its execution and competitive position, which should lead to additional margin drivers.”
Citi Research is not the only one to come out with a bullish recommendation. Credit Suisse analyst John Pitzer revised his price target from $20 to $25, more than 20% upside from the current price as he expects the supply of DRAM to remain tight through 2017. And yesterday Deutsche Bank’s Sidney Ho came out with a buy rating and price target (3) of $24. According to him “There could also be upside to NAND given what we observed as a stronger-than-expected ramp of its 3D NAND products,”. So both the cylinders are firing for Micron stock. (Also Read: This Could Be The Biggest Reason To Buy MU Stock)
Numbers To Look Out For
Earlier, the improving market fundamentals had allowed Micron to revise its Q1 guidance on the upside. When Micron had reported its Q4 2016 earnings, it had guided for first-quarter revenue to come in between $3.55 billion and $3.85 billion, with non-GAAP EPS between $0.13 and $0.21. This represented a revenue growth of around 10%, below the market’s expectation. However, the improving DRAM pricing allowed the company to revise its guidance on the upside. The company recently guided for a revenue of $3.975 billion, along with non-GAAP EPS of $0.28.
The revised guidance are considerably above the higher end of the previous guidance and represents a revenue growth of 18% YoY. The company also expects its Non-GAAP gross margin to come in around 25.5%, with a range of +/- 0.5%. The guidance is also in line with analysts estimates. The company has reported earnings beat in its previous four quarters and is likely to do the same in this quarter. (Also Read: 3 Reasons Why Micron Technology, Inc. (MU) Stock Is Still A Buy Going Into 2017)
Micron Stock Is A Buy On After Earnings Pull Back
Micron Technology, Inc. (NASDAQ:MU) is likely to post a strong guidance for the next quarter following the Inotera deal which Micron completed recently. The acquisition is expected to be EPS and FCF accretive from the start. The deal will also help Micron reduce the cost of production. Micron expects the cost of both NAND and DRAM to decline by 20%. So Micron is caught in a sweet spot of declining costs and rising prices, resulting in a strong margin expansion.
Micron stock is currently in a bull market gaining more than 60% in last six months. The rally in the stock price was supported by improving fundamentals and pricing power. The rising demand and supply constraints will help Micron post a strong growth and expand its margins. The recent analysts’ upgrades indicate that Micron stock has an upside of 20%-50%. Investors should buy the stock on any after earnings pullback.
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