Micron Stock: Why UBS Has Turned Bearish

Micron (MU) stock fell in premarket trading today. It was down 1.34% as of 4:52 AM ET after UBS slashed its outlook.

The stock also fell 2.5% on November 8 to close at $47.19, 8.2% below its 52-week high of $51.39 and 66.2% above its 52-week low of $28.39. At its November 8 closing price, Micron’s market cap stood at $52.2 billion. Year-to-date, Micron has gained around 48.7%.

UBS cuts its outlook on Micron stock

As per a report from Investing.com, UBS has turned bearish on Micron as of November 8. UBS analyst Timothy Arcuri has reduced his estimates on Micron for fiscal 2020 and fiscal 2021. He’s slashed his revenue and earnings estimates on the chip maker on the expectation of falling memory prices. Arcuri is concerned about NAND (negative-AND) pricing in the coming two years, according to Seeking Alpha. UBS currently has a “neutral” rating and a price target of $47 on the stock. In contrast, UBS has lifted its price target on rival NVIDIA (NVDA) to $240 from $195 due to its ray-tracing graphics chips, according to TheStreet.

Like UBS, Nomura has also warned about Micron’s declining memory prices. Nomura predicts softness in most chip stocks in the holiday quarter, as per reports. In contrast, Micron anticipated better demand conditions for fiscal 2020 during its fiscal 2019 fourth-quarter results.

During its fourth-quarter earnings release, Micron said its NAND selling price had plunged 8% sequentially. On the other hand, its DRAM (dynamic random-access memory) pricing was down 20% sequentially. Samsung (SSNLF) also reported a 29% YoY (year-over-year) decline in revenue in its third quarter. A steep decline in both NAND and DRAM pricing hurt Samsung’s margins in the quarter.

What does Micron expect ahead?

Micron predicts that DRAM and NAND demand will improve in the near term amid growing industry demand. Analysts, as well as CNBC’s Jim Cramer, are also upbeat about a recovery in chip demand.

However, we believe Micron’s exposure to China will remain a concern amid US-China trade tensions. The trade ban on Chinese tech giant Huawei significantly hurt Micron’s sales in fiscal 2019. Like Micron, Marvell Technology (MRVL) suffered from the Huawei trade ban in the second quarter of fiscal 2020, which ended on August 3. We believe continued trade war uncertainty will bring more declines for Micron. However, recently, Qualcomm (QCOM) reported an upbeat fourth quarter of fiscal 2019, which ended in September. Qualcomm remains confident that trade tensions will soon be resolved.

Micron expects a disappointing first quarter of fiscal 2020, which will hurt its stock. The company expects its first-quarter EPS to be $0.39–$0.52 and its revenue to be $4.8 billion–$5.2 billion. It expects 2.7% sequential revenue growth in the first quarter, but it also expects its earnings to fall 18% sequentially.

Lower memory prices could also lead to a contraction in its gross margins. For the first quarter, Micron expects its gross margin to be in the range of 25%–28%, down from 30.6% in the fourth quarter. Analysts expect a gross margin of 26.7% in the first quarter.

Wall Street analysts expect the company’s revenue to fall 36.4% YoY to $5.03 billion in the first quarter and 11.7% to $20.7 billion in fiscal 2020. They expect its sales to improve significantly by 21.2% to $25.1 billion in fiscal 2021.

Analysts expect Micron’s first-quarter EPS to fall 83.9% YoY to $0.48. They expect its adjusted EPS to drop over 60% to $2.51 in fiscal 2020. However, they expect its EPS to see growth of over 100% to $5.27 in fiscal 2021.

Analysts’ recommendations and target price

Among the 35 analysts covering Micron, 21 have “buy” ratings, and about 11 have “hold” ratings on the stock. Only three have given it “sell” ratings.

Currently, analysts have a 12-month target price of $54.59 on Micron. On November 8, the stock was trading at a premium of 15.7% to analysts’ 12-month target price. Its median target price was $55.00 on the same date.

Looking at the technicals

With a 14-day RSI (relative strength index) of 51.17, Micron stock is neither overbought nor oversold. An RSI of above 70 indicates that a stock is in “overbought” territory, while an RSI level of below 30 means that a stock is in the “oversold” zone.

On November 8, Micron closed near its Bollinger Band midrange level of $46.86, indicating that it’s neither overbought nor oversold.

As per the technical indicators, investors are mostly “neutral” on Micron stock. UBS’s waning outlook on Micron has left jittery investors anxious, but we’re hopeful. The company and analysts expect chip demand to improve in the next year.