- Wall Street has generally turned bullish on Micron stock saying it's perhaps time to buy.
- Recent physical supply checks by another analyst revealed that DRAM oversupply is likely to persist in the market.
- Should investors follow the bullish calls and buy Micron stock?
With Micron (NASDAQ:MU) due to report Q4 FY16 results on 30th March, investors can be forgiven for having a hard time deciding what to make of the company’s prospects in 2016 and beyond. After all, Wall Street itself appears deeply divided, with some analysts saying it’s finally time to buy the battered stock while others are saying the worst is not yet over and warning investors to keep off.
Sample a few recent bullish calls on Micron:
Cowen (Feb. 12): "[P]er our estimates, [48-layer 3D NAND] is ~60-70% more bits/wafer than 1z planar [NAND] – which reeks of an over-shoot and one where we remain very bearish on the supply side ... Relative to MU’s own solution, our field work continues to suggest a very strong offering with a truly unique 3D NAND process and is the “dark horse” in the 3D NAND battle and the one about which Samsung is most concerned."
Wells Fargo (Feb. 12): "In our view, the key takeaway from the presentations is that Micron’s upcoming DRAM and NAND technology transitions could help drive bit growth over the next two years, after several quarters in which bit growth paused, while also driving down cost per bit and helping Micron’s margins."
Mizuho (Feb. 15): says a ramp in Micron’s 20nm bits and 3D NAND during the second half of the year will lead to improved performance by Micron.
Susquehanna (Feb. 15): "FY17 is set up for a strong rebound in margins given the acceleration in cost/bit (for both DRAM and NAND) however, near term the stock may see pressure. The commercialization and adoption of 3D XPoint memory is pushed out from 2016 to 2017, with the mobile market (and not enterprise) as the first adopter. To help expedite the cost/bit reduction, MU's FY16 capex will come at the high end of previously guided range of $5.3B-$5.8B, with $0.7B-$0.8B financed by strategic partners."
These four Wall Street analysts made their bullish calls after Micron’s Winter Analysts Conference.
But then Nomura dropped the bomb when it said that actual physical checks with DRAM suppliers in Taiwan and Korea revealed that they had no plans at all to cut their DRAM supply to boost prices and margins and were more intent on maintaining their market share. That is perhaps the biggest risk for Micron investors because DRAM accounts for close to 60% of Micron’s top line.
DRAM memory is primarily used in PCs, and weak PC sales have been depressing demand leading to an oversupply and low prices. Micron’s average DRAM per-bit selling price fell 11% in 2015.
The bullish camp is generally basing its Micron buy calls on projections that a recovery in the battered PC market sometime in late 2016 or 2017 will boost DRAM prices. But not everybody is so sanguine. Indeed IDC expects the PC market to continue declining through 2019 albeit at a slower clip.
PC Shipments by Product Category and Region
|Product Category||Region||2015 Shipments (M)*||Market Share||2019 Shipments (M)*||Market Share||5-Year CAGR|
|Portable PC Total||163.1||59.0 %||170.0||62.4 %||1.0 %|
|Desktop PC Total||113.6||41.0 %||102.6||37.6 %||-2.5 %|
|Grand Total||276.7||100.0%||27 2 .6||100.0%||-0.4 %|
Source: IDC Worldwide Quarter PC Tracker, December 4, 2015
While it’s true that companies like Micron are usually able to diminish or even cancel out the effects of falling DRAM prices by lowering their production costs, a large supply overhang generally nullifies their efforts leading to piling losses. For instance, Micron predicts that it will be able to lower DRAM production costs by 15%-25% by 2017. But this will largely be nullified by DRAM ASPs which Nomura sees falling a massive 30% in 2016 alone. The decline in DRAM selling prices will therefore be much larger than Micron’s pace of lowering production costs leading to expanding losses for the company.
While Nomura’s bearish projections might still turn out to be too pessimistic, the fact that they are based not on Micron’s presentations but actual supplier checks probably lends them more credence than the bullish calls. It’s this realization that perhaps led to Micron stock selling off nearly 10% after Nomura made its bear call. Nomura says it met every major DRAM supplier in Korea and Taiwan, the largest manufacturers of DRAM memory.
Micron’s 3D NAND is generally expected to fare better than DRAM. Wells Fargo expects Micron to lower its 3D NAND cost per bit by 20%-30% by 2017, which will probably be enough to counter low selling prices. But 3D NAND contribution to Micron’s top line is still much smaller than that from DRAM.
So when is it safe to buy Micron stock? The last time things were this bad in DRAM-land was back in 2011 when Micron stock sank to just 0.7x book value. Micron stock is down 60% over the past 12 months, with the shares currently trading at 0.79x book value, so the stock can potentially continue falling. Investors should perhaps look out for signs of stabilizing DRAM during Micron’s upcoming earnings call. If the report turns out to be negative, investors should continue bidding their time until the first signs of improvements in the DRAM market emerge, and then they can buy Micron stock.