UBS Lowers Micron Price Target, Says DRAM Cycle Deteriorating Faster Than Projected

Micron Technology, Inc. MU could face the risk of rapidly deteriorating DRAM market fundamentals, according to UBS. 

The Analyst

UBS analyst Timothy Arcuri maintained a Neutral rating on Micron and reduced the price target from $52 to $41.

The Thesis

The decline in DRAM prices is faster and steeper than UBS previously forecast, Arcuri said in a Tuesday note. (See his track record here.) 

The analyst projects a 12-15-percent sequential decline in DRAM blended contract pricing in the first quarter of 2019 versus expectations for a 10-12-percent drop, while NAND flash is expected to see a 10-15-percent fall.

UBS attributes the downside in DRAM to the worsening impact of a CPU shortage on PC build rates and weakening server and mobile DRAM demand.

PC OEMs continue to trim on SSD inventories and smartphone demand continues to be soft, impacting NAND flash demand, Arcuri said. 

Despite these factors, the downside for Micron shares is limited, the analyst said. Even assuming DRAM/NAND ASPs were to fall by 30-40-percent year-over-year in 2019, Micron's total book value will approach $31 per share over the next 12 months, rendering the current valuation attractive, he said. 

"At the same time, we are probably about three months from consensus estimates bottoming and Street numbers still look greater than 20 percent too high after our cut — too wide a margin." 

UBS now sees a touch of risk to its Q1 estimates. It lowered its 2019 and 2020 revenue and EPS estimates while also trimming the price target for Micron, reasoning that the total book value will remain a more relevant valuation anchor than normalized EBITDA until the company approaches the bottom of Street estimates.

Price Action

Micron shares were trading down 0.57 percent to $36.36 at the time of publication Tuesday. 

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