It’s been a strong start to the year for semiconductor firm Micron Technology (NASDAQ:MU), but can the rally continue? The company has been plagued by worries about waning demand and trade tension, but with Micron stock being upgraded twice in just one week, investors are starting to take notice.
Here’s a look at the bull case for Micron Stock.
Perhaps the largest catalyst for Micron stock was an upgrade from BMO Capital analyst Ambush Srivastava. The reason Srivastava’s decision got so much attention is the fact that he did an about-face and turned from bull to bear. Srivastava says the decision to reverse comes from the fact that BMO believes the shares have “bottomed out.”
Don’t get me wrong, BMO still sees some risks on the horizon, namely worries that the market for memory chips won’t be strong forever and a downturn is on its way. However, Srivastava says Micron has been able to shore up its business to create a more profitable, financially stable company even in times of trouble.
The last time that the memory business faced a cyclical downturn, MU had negative free cash flow of $2.6 billion. Srivastava and BMO say that even in a worst-case pricing scenario, he doesn’t see Micron’s new improved structure turning out negative free-cash-flow again.
Following the positivity from BMO came an upgrade from Bernstein analyst Mark Newman who sees chip prices turning around rather than falling in the future. He claims that the sharp downturn that we saw among memory chip makers in 2019 has created a “faster supply response and earlier recovery in late 2019.”
According to Newman, the cyclical nature of the memory business is still a factor, but that it’s happening much faster than usual. He said the first half of 2019 will see industry earnings hit their bottom, which means the second half of the year will be the beginning of the up-cycle.
Micron’s management issued less than stellar second quarter guidance at the beginning of this year, forecasting revenue between $5.7 billion and $6.3 billion and EPS of between $1.65 and $1.85. That hurt the stock considerably as most had been expecting better and the news ultimately confirmed what investors had been fearing- demand in the memory market was on the decline.
So, its almost certain that the second quarter will see memory chip makers like Micron struggling with excess inventory and sub-par demand. But the real question here is whether Q3 and beyond will start to look up.
If Bernstein is to be believed, MU investors only have another quarter or so to suffer through before conditions improve. Plus, according to BMO, even if the issues persist, things won’t get as bad for Micron because the firm has improved its operations enough to withstand the downturn in the memory market without pushing FCF into the red.
Is it a Bargain?
Although things are looking rosier for MU according to its latest upgrades, its worth noting that MU stock isn’t risk-free. Both analysts pointed out that the share price could drop even further in the near-term if conditions continue to worsen.
Plus, you have to keep in mind that these are just opinions, no one can forecast the future. Worsening tension in China, an economic disaster in the U.S. or any number of factors could throw off those predictions. Buying Micron stock isn’t exactly a super-safe bet.
However, the firm’s share price more-than reflects that risk profile and thats what makes it appealing. MU stock has a P/E ratio of just 2.9. That’s incredibly cheap even when you consider that prices might continue to decline as demand for memory chips sees continued weakness.
The Bottom Line
We might see some more turbulence for Micron stock in the near-term, but the bottom line is that demand for memory products will eventually make its way higher.
Micron looks capable of withstanding demand issues if necessary, but the firm is also set up to make an impressive recovery if things improve during the second half of the year. The company’s ultra-low share price and potential to bounce make it a deal that’s too good to pass up.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.