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Micron was upgraded to Outperform from Market Perform by BMO Capital’s Ambrish Srivastava just hours before an earnings announcement.
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It takes a lot of faith to upgrade a volatile stock like a memory-chip manufacturer.
Micron Technology’s earnings report is due in a few hours. 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.
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Micron had forecasted sales 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. Non-GAAP profits of $1.62 per share, plus or minus 7 cents, were expected, with non-GAAP margins of 41.5 percent, plus or minus a percentage point, according to guidance. The average on Wall Street is anticipating revenue of $7.23 billion and profits of $1.71 per share. 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.” Strong demand from the server and datacenter sector, as well as sustained growth in 5G mobile phones, are projected to more than offset expected reduced demand from the PC market, according to him. Srivastava now expects Micron to earn $5.85 per share in the August 2021 fiscal year, up from $5.40 previously, and $12.20 per share in fiscal 2022, up from $10.75 previously. Micron’s stock is now trading at $83.82, up 1.1 percent. Eric J. Savitz can be reached at eric.savitz@barrons.com./n
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