Micron's Inflection Point: Summit Redstone Upgrades From Sell To Buy

Micron Technology, Inc. MU is facing favorable industry dynamics and DRAM gross margins seem to have bottomed out and could “inflect higher going into FY17.”

Summit Redstone Partners’ Jagadish Iyer upgraded the rating on the company from Sell to Buy, while maintaining the price target at $26.

DRAM Prices To Inflect Higher

Since limited capacity additions are expected from Hynix and Samsung in 2017, industrywide DRAM bit growth is estimated at ~30 percent year-over-year, which is a little higher than the 2016 growth. Demand has continued to be robust, and DRAM pricing would likely increase since its inflection in August 2016 and could stabilize going ahead, Iyer mentioned.

Micron has plans to increase its 20nm output in 2017, exceeding industry bit growth, and could generate more than 20 percent in cost savings.

Micron recently closed the Inotera acquisition, which should result in gross margin accretion of 100-200bps and incremental free cash flow, Iyer stated. He expects Micron’s overall DRAM gross margins to expand 35.6 percent in FY 2017, from 22.7 percent in FY 2016.

Higher Prices For NAND

Recent industry checks indicated “all the NAND makers have hiked prices” by 5-10 percent due to the ongoing supply shortage arising from 2D to 3D NAND conversion, the analyst said. He added, “Our sources also indicated that price increase may persist at least through 1HCY17.”

Micron’s NAND gross margins could expand by 700bps through FY 2017.

“Given the margin expansion in DRAM and NAND segments, we estimate Micron’s overall gross margins should rise by 1000bps in FY17 driving Non-GAAP EPS to $2.32 from $0.06 in FY16,” Iyer wrote.