MU - Micron Stock - Still Buy: More Upside Likely Ahead

2023-11-28 15:30:07 ET

Summary

• We remain bullish on Micron Technology, Inc.
• Management’s updated guidance for Q1 2024 confirms our expectation of better memory demand dynamics and improved pricing in 2024.
• Management guides revenue higher from a previously projected $4.4B ± $200M to $4.7B and expects non-GAAP gross margin to approach breakeven next quarter.
• We believe the memory inventory correction is over.
• We see an increasingly favorable risk-reward profile for Micron next year and recommend investors buy the pullback.

We remain buy-rated on Micron Technology, Inc. ( MU ). Management raised guidance for Q1 2024 earlier today from previously guided $4.4B ± $200M to $4.7B and now expects Non-GAAP gross margin to approach breakeven next quarter versus previous guidance of gross margins at minus 4%, ± 200 basis points. We think the better-than-expected guidance for next quarter confirms our expectation of a memory market rebound in 2024 due to improved demand and pricing dynamics. The following outlines MU's updated guidance for next quarter.

Management noted "improved supply and demand balance and improved pricing" as the drivers behind the higher guidance and, on the UBS Technology conference call , indicated that after forecasts of improved inventories and pricing bottoming out in Q4, management is now seeing "pricing starting to increase." Tom's Hardware research confirms more of the same:

"Memory makers are witnessing increasing prices as production reductions lead to price rises in both DRAM and NAND segments."

The improved pricing is an industry-wide shift after DRAM prices crashed earlier this year, dropping 20% QoQ in Q1 2023 and further in Q2, with DDR5 prices declining more than DDR4 prices. The following graph puts into perspective how bad the price crash was.

We think the cut in production from DRAM industry leaders, including MU, SK Hynix, and Samsung (SSNLF), has aided in creating a more balanced demand-supply dynamic in the back end of the year. Now, DDR4 and DDR5 prices are expected to improve subtly, and the consumer DRAM market is expected to see prices increase, with TrendForce forecasting a price increase of as much as 8% this quarter. Management left a lot unsaid aside from the raised guidance, but we believe this is a classic buy the rumor, sell the news type action with the stock.

Valuation

Micron stock is trading below the peer group average; given the upside potential with the memory rebound next year, we think the stock is undervalued. The stock is trading at 5.1 EV/C2023 sales versus the peer group average of 5.8x. We see attractive entry points at current levels and recommend investors explore entry points into the stock.

The following chart outlines MU's valuation against the peer group.

Word on Wall Street

Wall Street shares our bullish sentiment on the stock. Of the 36 analysts covering the stock, 27 are buy-rated, seven are hold-rated, and the remaining are sell-rated. The stock is currently priced at $75 per share. The median sell-side price target is $80, while the mean is $79, with a potential upside of 6-7%. The following outlines sell-side ratings and price targets for MU.

What to do with the stock

We continue to be bullish on Micron Technology, Inc. stock. We see more material upside for the stock in 2024 due to a recovery in demand and pricing for DRAM and NAND, with more emphasis on the former for MU's outperformance in 2024. We continue to recommend investors explore entry points into the stock on the pullback to ride the upward trend in 2024.

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