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Micron Has Upside Potential—Just Ask These Analysts

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Micron Technologies (MU) stock has been in a rough patch for some time now. The company has been suffering due to the ongoing US-China trade war, a semiconductor downcycle, and a recessionary scenario. Falling memory prices amid a slowdown in demand for memory chips at various levels further hurt the chip maker. Micron manufactures DRAM (dynamic random-access memory) and NAND (negative-AND) memory chips. DRAM chips are used in desktop computers and servers, while NAND chips are used in smartphones and solid-state hard drives.

Since last year, Micron has been facing lower demand in the server market and among smartphone companies. According to DRAMeXchange, part of TrendForce, DRAM prices fell nearly 30% in the first quarter and 25% in the second quarter. DRAMeXchange also predicted that DRAM prices would fall further, accelerated by the Huawei trade ban. Lower memory chip prices aren’t good for Micron and are visible in its lower earnings. In the third quarter of fiscal 2019, Micron’s earnings fell 67% year-over-year and 39% sequentially.

The cryptocurrency bubble burst, and Intel’s (INTC) CPU (central processing unit) supply shortage also led to excess inventory. The Huawei trade ban also delayed the process of balancing demand-supply memory prices. As a result, Micron and other chip makers started reducing their productions to bring chip supply in line with demand.

Despite the odds, some analysts are betting on the stock, as they believe chip demand could rally in the near term. So should investors buy or hold Micron right now? Let’s have a look at its growth trends and some other metrics.

Analysts expect a rebound in memory chips

In July, Deutsche Bank raised its price target on Micron to $55 and reiterated its “buy” rating. Deutsche also maintains its positive stance on the memory chip maker and expects it to “upturn” in the near term. According to Deutsche analyst Sidney Ho, “We have more confidence that F4Q19 (Aug) will be the trough quarter for MU for this cycle.” The analyst also believes that “the risks of further negative estimate revision seem less likely.”

In the third quarter, DRAM and NAND selling prices fell 20% and 15%, respectively. However, these falls were narrower than the second quarter’s falls of 22% and 25%, respectively. Ho believes that memory prices have now bottomed out, and the stock should rally from its current levels.

Goldman Sachs analyst Mark Delaney also has a positive outlook on memory chip demand and believes that the downturn is likely to end soon. In July, Delaney said he expected the demand-supply balance to improve in the coming months.

Trade war pressure

The trade war between the US and China has had a significant impact on semiconductor stocks. Companies such as Micron, Qualcomm (QCOM), Intel, and Broadcom (AVGO) generated substantial revenues from China in 2018. US companies including Qualcomm, Micron, and Intel generated $11 billion in revenues from selling components to Huawei alone, according to Reuters. Huawei contributed nearly 13% to Micron’s revenue in the first half of 2019. Therefore, a trade deal should fuel Micron stock.

Micron stock’s price movements

Micron stock has been generating stellar returns YTD (year-to-date). The stock has gained 47.5% YTD and has outperformed the broader market. On a positive note, Micron has also provided higher returns than most of its peers. NVIDIA (NVDA), Intel (INTC), and Qualcomm have returned 26.7%, 6.3%, and 38.3%, respectively, this year. Advanced Micro Devices (AMD) is up about 67.7%. The VanEck Vectors Semiconductor ETF (SMH) is up 32.8% YTD.

Micron stock rose 4.05% yesterday and closed at $46.81. The stock was also up 2.09% in premarket trading today. The Dow Jones Industrial Average gained over 200 points, while the S&P 500 and Nasdaq Composite increased over 30 and 100 points, respectively, on Wednesday. The broader markets gained after Hong Kong leader Carrie Lam passed a resolution to withdraw her controversial extradition bill. Investors were happy with this result, as it could help lead to better trade terms.

Surprisingly, on Thursday morning, US and China trade officials agreed to meet early in October. US and European futures spiked on the news.

Analysts’ recommendations for Micron

Analysts mostly have “buy” ratings on Micron stock. Among the 34 analysts covering the stock, 56% give it “buy” ratings, 35% give it “holds,” and only 9% give it “sells.” Currently, Micron analysts have a 12-month target price of $48.26 on the stock. On September 4, the stock was trading at a discount of 3% to analysts’ 12-month target price.

Micron’s technical levels

Micron’s 14-day RSI (relative strength index) score is 61.66, which indicates that investors have nearly overbought the stock. An RSI level of above 70 shows that a stock is in “overbought” territory.

On September 4, Micron stock closed near its Bollinger Band upper-range level of $46.34. This value denotes that the stock has been overbought.

Though the technical indicators show that Micron stock is already “overbought,” we believe it has further upside potential. Analysts’ optimistic views, trade deal hopes, and other recent positive events also favor the stock.

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