Shares of Micron (MU) are sliding this morning after Baird analyst Tristan Gerra said the stock is no longer a top semi large-cap idea as gross margin is near a peak. Furthermore, the analyst believes DRAM pricing is also likely peaking in the third quarter as NAND oversupply worsens. Meanwhile, his peer at Deutsche Bank argued that while recent price weakness in both DRAM and NAND will likely fuel debate regarding a potential cycle peak and the need to revise down earnings estimates, all these factors appear to already be priced in the shares' valuation.
MICRON NO LONGER TOP IDEA: In a research note to investors this morning, Baird's Gerra lowered his price target for Micron to $75 from $100. The analyst reiterated an Outperform rating on the stock o valuation but removed the name as a top semi large-cap idea as he believes gross margin is near a peak. Moreover, the analyst pointed out that DRAM pricing is likely peaking in the third quarter, while NAND oversupply has worsened recently. Given the first half of the fiscal year 2019's weak seasonality in NAND, Gerra does not expect a stabilization in NAND flash pricing until the second half of the year and is modeling a moderate pricing decline in DRAM for 2019, well within Micron's cost reduction abilities.
PEAK CYCLE PRICED IN: In a research note of his own, Deutsche Bank analyst Sidney Ho reiterated a Buy rating and $80 price target on Micron's shares. The analyst argued that while recent price weakness in both DRAM and NAND will likely fuel debate regarding a potential cycle peak and the need to revise down earnings estimates, he believes these factors are already priced in as the stock is trading at 4.5 times the Street's 2019 EPS estimate. As Micron continues to execute on its technology roadmap and delivers solid operating results through the business cycle, Ho expects the stock's valuation multiple to be re-evaluated by the market. On gross margin, the analyst pointed out that he sees the company benefiting from "solid cost improvement through technology transition" in fiscal 2019. The DRAM market has become more diverse, which should help offset temporary weakness in any given end market, he contended, adding that 20% of Micron's revenues come from the automotive, industrial and networking markets that tend to see much less volatility than the PC, mobile and server markets.
WHAT'S NOTABLE: Presenting at Citi's Global Technology Conference this morning, Micron's CFO Dave Zinsner said that the company is going to be "more of a product company than we've ever been" and that Micron's DRAM products that go into automotive and IoT end-markets are a focus of the company and do not get a lot of attention from the market. The executive also noted that NAND pricing has declined by a "reasonable number" in the third quarter. While capital intensity is higher now given the changes in the memory industry, the company must be careful not to "get ahead of its skis" with its spending, Zinsner contended, adding that Micron needs to add cleanroom space to manage node transitions.
PRICE ACTION: In morning trading, shares of Micron have dropped over 8% to $45.49.
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