Goldman Sachs Downgrades Micron: 3 Reasons Why

Goldman Sachs is dropping its bullish thesis for Micron Technology, Inc. MU despite an improving DRAM industry with new demand drivers like artificial intelligence.

The Analyst

Goldman Sachs' Mark Delaney downgraded Micron Technology from Buy to Neutral with a price target lowered from $68 to $50.

The Thesis

Micron is expected to continue benefiting from DRAM price increases and should beat consensus estimates through the first quarter of 2019, Delaney said in the downgrade note. (See his track record here.) 

Yet the analyst named three reasons why investors should no longer be buyers of the stock:

• Micron's stock is historically correlated to margins, but looking forward through mid-2019, gross margins should decline sequentially, Delaney said. Margin weakness could be attributed to lower memory average selling prices from a challenging DRAM S/D market along with an oversupply of NAND, he said. The DRAM and NAND weakness implies that Micron is likely to report earnings for 2019 that are 31 percent below the Street's current estimate.
• Memory downturns are highlighted by an acceleration in price declines, which prompts customers to delay their buying activity and wait for even lower prices, Delaney said. This "snowballing effect" typically lasts several quarters and could also result in a downturn that is worse than originally expected, he said. 
• Depending on how bad of a downturn it experiences, Micron's stock could fall as low as $20 per share under a worst-case scenario, Delaney said. One of the more commonly used metrics that investors follow during downturns is price/tangible book and EV/sales. Assuming a peak-to-trough DRAM ASP decline of up to 50 percent, the analyst's two valuation methodologies yield a price range of $21-$49 and $19-$41, respectively.

Price Action

Micron shares were falling 6.34 percent to $40.84 at the time of publication Wednesday. 

Related Links:

Rosenblatt Securities: Micron's Q3 Shows 'Near-Flawless' Execution

Stifel's 5 Takeaways From Micron's Analyst Day

Photo courtesy of Micron Technology.