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Sorting Through the Rubble on Micron Technology, Inc. (NASDAQ:MU)

Micron Technology, Inc. (NASDAQ:MU) has been bloodied again off earnings. But we want to take a serious look at where the stock is in terms of its market cycle.

Wednesday’s reaction, we believe, was more about the broad market than it was about MU. The bad news that was carried by Tuesday’s earnings and outlook really didn’t represent anything new for the company. It was a rehashing of themes that we were basically expecting. But the company couldn’t have picked a worse time to deliver the message to investors, as the market was clobbered on Jerome Powell’s third-digit response to President Trump.

Micron Technology, Inc. (NASDAQ:MU) is, as the reader is likely no doubt aware, probably the most important DRAM play. Dynamic random-access memory (DRAM) is a foundational semiconductor memory form that stores each bit of data in a separate tiny capacitor within an integrated circuit. This is a straight binary process.

The company also provides NAND products, which are electrically re-writeable, non-volatile semiconductor memory, and storage devices. Between the two (DRAM and NAND), the company is a central weather gauge for the memory cycles that underlie a lot of the technology sector business cycle. So, it’s an extremely important stock to understand and follow – probably more than most people really understand.

In addition, Micron and Intel have been collaborating in a JV project called IM Flash Technologies that is primarily centered around developing and operationalizing 3D XPoint technology.

Micron recently bought out the partnership from INTC and plans to implement the tech in 2019. In addition, the company has a strong balance sheet, with cash levels far exceeding current liabilities ($6.8B against $5.8B).

As noted above, MU hit the market with an imperfect earnings report and guidance that acknowledged the tough point in the cycle and the problems associated with an unmitigated CPU shortage from Intel.

The implications of Micron’s disappointing guidance, which also featured a sizable $1.25 billion cut in its FY19 capex guidance, include a nod to general concerns about the semiconductor industry being in the grip of a cyclical slowdown as Micron’s DRAM and NAND products are found in PCs, video cards, smartphones, and solid-state drives, broader concerns about economic growth slowing, concerns about revenue and earnings estimates for chip equipment makers like Applied Materials (AMAT) and Lam Research (LRCX), renewed worries surrounding NVIDIA’s (NVDA) sales prospects considering the market has already received some indication that the company’s latest line of video cards is not being received as well as the company had hoped, and concerns that tariff actions are having a negative impact on the sector and the chip space.

However, the real rub is the first point (cyclical demand slowdown in NAND and DRAM) paired with general broad market weakness and investor unwillingness to stick necks out.


Notes from the Sell Side

  • Needham downgrades MU to Hold from Buy. Micron issued F2Q19 (Feb) guidance significantly below consensus (missed by 17%) based on weakening demand conditions (high-end smartphones and graphics), inventory adjustments at hyperscale customers and seasonal weakness. Micron is confident that demand will reaccelerate in C2H19 and that it can navigate through this period of inventory workdown; however, they are concerned that demand conditions could worsen further and place further pressure on margins. While they are hesitant about downgrading at this valuation level, they believe the overall demand environment will remain murky for at least the next six months and therefore we move to the sidelines.
  • RBC downgraded to Sector Perform
  • Cowen cuts MU tgt to $40 from $45. Elevated inventory entering the seasonally weakest demand period of the year threatens any meaningful near-term recovery in ASPs, GMs and the stock. They do see several self-help levers for MU that can buoy FCF, however. From a downside perspective, they struggle to see the stock trading below current TBV, or ~$28. Target to $40 w/ MU’s outlook ominous for NTAP, ICHR and UCTT.
  • Riley FBR notes MU confirms a deep near-term Memory spending trough, something they’ve feared since 10/29s “The Good, The Bad, and The Ugly…”. That adds to 1H19 revenue estimate concerns at Memory-levered AMAT (Neutral; $33 PT) and LRCX (Neutral; $160 PT) as well as Memory-related small-caps such as ACLS (Neutral; $18 PT). They believe FORM (Buy; $18) has significantly Foundry+Logic offsets to any DRAM risks.
  • Credit Suisse: Still Cheap, Still Looking for a Bottom; Outperform
  • Cascend Research: For longer-term players of semiconductors, Micron (MU) represents a good value play IF you are willing to wait a year to see significant returns. Shorter-term investors might even see slightly more downside in Feb Q unless the trade war has been settled. EPS is likely to come down further, but we don’t expect it to come down enough to make MU not look like a good value. They don’t believe this is a deep, dark cycle in which most semiconductor companies can barely hold on to profitability — they believe this will be short lived and thus can be an opportunity. Maintain Buy rating, but only because they missed the stock coming down over the summer, and now it is a longer-term value play.

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