High inventory levels have analysts concerned about the timeline for Micron’s recovery
Micron Technology Inc. shares are headed for their best day in seven and a half years after the chipmaker posted a better-than-feared earnings report, but some analysts aren’t ready to cheer a recovery.
The company is “not in the clear yet,” wrote Cowen & Co.’s Karl Ackerman, even though Micron MU, +13.34% hinted that demand conditions were improvingand spoke of an ability to still sell some products to Huawei Technologies Co. “We want to be positive, but we also think these silver linings are equally offset by the further build-up of inventory,” Ackerman said.
Micron now has inventories of 146 days, which is “uncharted territory” for the company, according to Ackerman, representing an increase of 48 days from a year earlier.
“With an estimated ~70% of inventory in die bank form, it appears to us that actual inventory dollars for those bits are understated by ~20% for final test and packaging costs,” he wrote. “Thus, the stockpile of memory bits seems understated, and demand equilibrium still seems like a pipe dream for C2019 if we assume only seasonal demand growth for both CQ3 and CQ4.”
Ackerman has a market perform rating and $38 target on the shares, which are up 13% in Wednesday trading and on track for their biggest single-day percentage gain since Dec. 22, 2011. Micron’s report is helping to lift chip stocks more broadly, with the PHLX Semiconductor Index SOX, +3.21% up 3.4%. Western Digital Corp. shares WDC, +7.30% are up 8.2%, while Advanced Micro Devices Inc. shares AMD, +3.67% are up 4.5% and Nvidia Corp.’s stock NVDA, +5.14% is up 5.9%.
Piper Jaffray’s Harsh Kumar also stayed on the sidelines following the report, writing that the NAND and DRAM pricing pressure experienced in the latest quarter could persist for several more periods amid issues of oversupply. “Given the ASP pressure, lower fiscal 2020 capital expenditures, and supply-demand imbalance, we tend to believe broader demand may be more tempered than previously expected,” he wrote in a note to clients.
Kumar is concerned as well by the company’s inventory levels and expects quarterly earnings per share below $1 on a quarterly basis for “the next few quarters.” He rates the stock at neutral with a $36 target.
Baird’s Tristan Gerra predicts that “recovery expectations will likely get further delayed” due to “overwhelming” macroeconomic conditions.
“Excluding the inventory buffer due to NAND flash architecture transition and broader, higher-value product mix, Micron’s inventory days are higher than during the 2010-2013, four-year downturn,” Gerra wrote. “Customer’s awareness of high die bank inventory levels likely provides a deleveraging incentive for them, and we believe DRAM/NAND customer supply-chain inventories are well above normal levels.”
He rates the stock at underperform with a $28 target price.
Other analysts were more upbeat, including Needham’s Rajvindra Gill, who upgraded the stock to buy from hold. “Book value has stabilized and will increase, by our estimate, because unlike in past years, Micron is no longer generating losses or burning cash,” he wrote. “While Micron still sees excess DRAM supply, it also sees signs of improvement in bit demand in most DRAM end-markets, esp. cloud, graphics, and PC.”
At least four analysts lowered their price targets on Micron’s stock after the report, according to FactSet, and the average target is $44.93, 23% above current levels. Of the 33 analysts tracked by FactSet who cover the stock, 19 have buy ratings, 10 have hold ratings, and four have sell ratings.
Micron’s stock has gained 16% so far this year, as the PHLX Semiconductor Index has risen 24% and the S&P 500 SPX, -0.12% has gained 17%.