Renewed Support for Micron as Goldman Sachs Upgrades to Buy Rating

Nikhil Gunderia & Kareem Winters

On Monday before the opening bell, Analysts at Goldman Sachs upgraded Micron Technology Inc (MU) from Neutral to Buy. The price target (PT) of $58 represents a potential 26% increase from Friday’s closing price. So why the renewed support for Micron?

Micron Technology’s new Buy rating from Goldman Sachs comes as a result of signs of improvement in their competitive positioning within the DRAM & NAND markets. Over the past five years, Micron has closed the gap in capital expenditure by around 200 basis points with competitors such as Samsung in the DRAM market. On the other hand, Micron is now outspending all of their competitors, except for Samsung, in the NAND product market. Their dedication to increasing CapEx for higher volumes than that of their competitors in both the DRAM and NAND markets is part of the reason why Goldman Sachs sees a positive outlook for Micron’s future.

Based on Micron’s improvement within their industry, Goldman Sachs believes the stock’s risk/reward to “skew positive”. Micron’s current price-to-tangible book value (P/TBV) multiple is 1.4x, slightly above the 1.1x multiple at their previous low and below the three year median of 1.8x. Although there is a possibility that they could eventually have a P/TBV hovering 1.1x, the growth in market share within the industry and improved free cash flow (FCF) indicates potential upside for the stock. After running an in-house probability model, Goldman Sachs predicts that if the shares were to trade in-line with its peak in 2014, there could be potential value creation of up to 183% (in the most bullish case).

While analysts remain upbeat on the stock, some risks were expressed in the note and must be considered by investors. These potential risks included lack of supply discipline, weaker than expected demand, and inventory overhaul. The number of competitors in the NAND market could lower market share for Micron by causing oversupply. On the demand side, if support is weaker than expected, it could intensify the oversupply issue. The inventory overhaul could drive supply prices higher for Micron and potentially lower industry pricing.

Investors seem to share the optimism of Goldman Sachs as Micron stock is up today ~6%, near $49 around the time of publication).

Disclosure: At the time of publication, we have no positions in any of the securities mentioned in this article. We wrote this article ourselves, and it expresses our own opinions. We are not receiving compensation for creating this article (other than from TheStreet) and have no business relationship with any company whose stock is mentioned in this article.

LIVE WITH JIM CRAMER - WATCH THE REPLAY
Enter your email to register or login. Registration information may be shared with advertising partners in accordance with our Privacy Policy.