On October 20, semiconductor giant Micron (MU), pledged more than $150 billion to the acceleration of its memory chip output over the next 10 years, including investments in research and development activities to bridge the growing gap between chip demand and supply for DRAM and NAND. The announcement was made amid the persistent chip shortage that has plagued productions across several industries.
Micron’s 10-year investment and spending plans have raised concerns regarding a potential overhang on free cash flows and excessive growth in wafer manufacturing capacity.
To debunk these notions, Needham analyst Rajvindra Gill used data from Global Microelectronics Market Data (SEMI) to analyze Micron’s possible incremental capacity according to historical capital expenditure.
“We estimate that Micron’s capacity would rise at a CAGR of 2.1% over the next 10 years, which we believe should not be a cause for alarm of over-supply,” deduced Gill. To support his estimates, the analyst stated his expectation of strong DRAM and NAND demand from the 5G industry, and from the growing proliferation of AI.
Gill also pointed out that the recent efforts to reduce dependence on China for the supply of semiconductors and increase domestic production may result in subsidies of the high production costs. Thus, the analyst expects subsidies to take some steam off Micron’s free cash flow pressures.
Significantly, if the need for capital arises for Micron due to competitive reasons, Gill expects the company to be in a position to benefit from capital return flexibility, including share repurchases during cyclical sell-offs, as well as have a “safety buffer for more R&D or CapEx spending.”
With these observations, Gill reinforced a Buy rating on Micron with a price target of $130. (See Analysts’ Top Stocks on TipRanks)
Consensus, however, is cautiously positive about Micron, with a Moderate Buy rating based on 15 Buys, 6 Holds, and 1 Sell. The average Micron price target of $96.09 indicates an upside potential of 39.8%.
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Disclosure: At the time of publication, Chandrima Sanyal did not have a position in any of the securities mentioned in this article.
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