Markets are suddenly in a risk-averse mood when it comes to tech.
And Micron (MU) , which operates in an industry that has been notoriously cyclical over the years, certainly isn’t being spared. That has led the memory giant’s valuation to drop to levels that look very cheap even if pricing for its core DRAM business weakens a bit — just as long as it doesn’t fall off a cliff.
Micron’s shares fell almost 10% to $44.65 on Thursday on what was a rough day for tech stocks in general, and for chip and chip equipment firms in particular. Its plunge comes after CFO Dave Zinser and IR chief Farhan Ahmad presented on Thursday morning at the Citi Global Technology Conference, and after Morgan Stanley and Baird analysts offered cautious remarks on the firm.
Morgan Stanley, which has been offering cautious-to-negative commentary about chip stocks for much of 2018, asserted that memory market conditions have recently been weakening. “For DRAM, demand is weakening, inventory and pricing pressures are building, and vendors are struggling to move bits…In NAND [flash memory], there is just too much supply,” wrote analyst Shawn Kim.
Baird’s Tristan Gerra, meanwhile, maintained an Outperform rating but cut his price target by $25 to $75. He argued DRAM pricing is likely peaking in Q3, and forecast NAND prices won’t stabilize until the second half of 2019.
Of course, Gerra’s price target is still more than 60% above where Micron currently trades. And notably, he only forecasts a moderate 2019 drop in DRAM prices, which have soared over the last two years, and also thinks Micron’s cost-reduction efforts (made possible in part by investments in its 1x and 1y manufacturing processes) can offset the decline.
Other analysts, such as JPMorgan’s Harlan Sur and Deutsche Bank’s Sidney Ho, defended Micron on Thursday. And in their Citi conference talk, Zinser and Ahmad weren’t exactly predicting the bottom is about to fall out of the memory industry.
Like NAND rival Western Digital (WDC) , as well as quite a few NAND buyers, Zinser noted that NAND prices have been falling recently, albeit while adding that Micron has been able to partly offset the declines by growing its sales of solid-state drives (SSDs) and other NAND products featuring relatively high average selling prices (ASPs).
With major NAND suppliers having forecast a 40% or greater increase in 2018 industry bit shipments amid a production ramp for high-density 3D NAND chips, odds are good that NAND pricing will remain under pressure for a while. That’s true even if lower prices boost smartphone and SSD NAND consumption, as is likely
Regardless, with respect to Micron’s DRAM business, which accounts for over three-quarters of its gross profit, Zinser and Ahmad’s remarks remained quite positive. They reiterated that Micron expects industry bit shipments to rise about 20% this year, as an industry that has largely consolidated around Micron, Samsung (SSNLF) and SK Hynix keeps a lid on capacity growth, and that demand growth will be similar. They also once more argued that DRAM consumption within data center, mobile, automotive and industrial end-markets will continue to rise.
To be fair, there have been signs lately that DRAM prices are no longer rising. Research firm TrendForce recently noted that PC DRAM contract prices were flat in August, and HP Enterprise (HPE) stated on its Aug. 28th earnings call that DRAM price increases “appear to have peaked.” And although Apple’s (AAPL) fall iPhone ramp and broader seasonal strength could still prop up DRAM prices in the near-term, it’s not hard to imagine a moderate price decline by early 2019.
But assuming the DRAM industry’s Big 3 continue keeping a lid on supply growth, there’s no reason to expect prices to nosedive for now. And the bottom-line impact of any price decline needs to be looked at in the context of Micron’s valuation.
Micron, whose fiscal fourth quarter (August quarter) earnings report is due on Sep. 20th, currently trades for around four times its fiscal 2018 and 2019 consensus EPS estimates of $11.76 and $11.61, respectively. And the company is four months removed from unveiling a $10 billion stock buyback that it promised to launch in fiscal 2019, which started this month.
Suppose, then, the fiscal 2019 EPS consensus proves a little too optimistic due to the easing of DRAM prices and ongoing NAND pressures, and Micron only delivers around $8 in fiscal 2019 EPS. Shares would still only be trading for less than six times forward earnings in such a scenario.
Until there are signs that DRAM supply growth is set to significantly outpace demand growth — and there aren’t any for now — Micron’s tumble into the mid-40s arguably has a strong element of panic-selling to it.