Shares of Micron Technology, Inc. NASDAQ: MU got a boost Thursday, rising 3% on the heels of a price-target upgrade from analyst Simon Woo. The Bank of America/Merrill Lynch analyst told clients he sees the memory maker’s shares finding $60. That’s a 33% gain from July 18, 2019’s closing price of $44.67.
Woo points to DRAM spot prices rebounding recently due to chip supply shortage concerns and disruptions at Samsung and Hynix. He says Micron’s earnings and stock prices closely correlate to the spot price trend.
Although DRAM prices have been on the rise as a result of trade tensions between Japan and South Korea, DRAMeXchange has a different take:
“Looking at demand, we see that whether PCs and smartphones at the retail end or the implementation of enterprise servers and datacenters, overall end demand still seems to be rather weak. Yet looking back at supply, we see DRAM suppliers generally sitting at over 3 months’ worth of inventories, leading to a continual sliding of contract prices for PC, server, and mobile DRAMs at the beginning of 3Q with no signs of reversal as of yet. TrendForce thinks the possibility of a structural reversal of supply and demand in the DRAM market to be slim.”
They both can’t be right. Let’s examine Wall Street’s expectations for the company’s sales, earnings, financials, and historical metrics to see which side of the trade is likely to win.
Analysts believe MU will earn $11.95 per share (EPS) in 2019 on revenue of $23.08 billion. One can’t help but notice those numbers are expected to take a big hit in 2020. Numbers are going to get smacked like an 85 mile-per-hour batting practice fastball. Sales are expected to fall to $19.7 billion with $6.21 per-share making it to the bottom line
Since the stock market is a forward-looking entity, it doesn’t make sense to use 2019’s forecasts with a profit cliff staring us in the face.
In the last decade, the chip supplier has traded with a median price-to-earnings (P/E) ratio of 8.04. The maximum valuation was 341 times earnings with a minimum P/E of 2.46. MU hasn’t traded above the mid-point since March 2018. The average P/E for the last 16-months is just 4.2. Today, Micron trades at 5.17 times profits-per-share.
Using today’s P/E, MU shares would trade at $32.11 per share based on 2020’s earning forecast. That’s a long way from $60 and approximately 33% lower than Micron’s July 18, 2019 closing price of $44.67. To hit $60 requires investors to value the company at 9.66 times next year’s EPS. That’s probably a stretch for a company with declining fortunes. Even the median 8.04 seems a bit pricey and would put the stock at $49.93; a little more than five dollars higher than where it is today.
For the last five-years, Wall Street has been willing to bid MU shares at an average of 1.67 times revenue, which is a little lower than today’s 1.8 price-to-sales (P/S) ratio. The story gets worse using the five-year average P/S ratio using 2020’s consensus revenue forecast. How does $24.94 sound? Not so good, right? Even at today’s better than average 1.8 times the top line, the stock would fall to $32.24.
Micron’s price action since late June has put the DRAM maker in overvalued territory with a relative strength (RSI) score above 70. Many times, a reading above 70 begins to attract sellers. Shares are flirting with recent highs and possible price resistance. If the price can make it through and close above $48ish, MU would have a legitimate chance to challenge its 52-week high of $57.56.
Outlook: Short-term investors could be rewarded with some immediate gains provided DRAM prices continue to rise. Simon Woo’s price-tag of $60 for Micron is possible, but likely short-lived once tensions ease between Japan and South Korea.
Once the outside catalyst is removed, Micron’s sales and earnings projections do not warrant a $60 price in our view. The play here might be to let MU rise and take a position in put options. At some point, weak demand combined with high inventory levels will hit DRAM prices and Micron’s stock prices.