For the past half year or so, Micron (MU) shares have been trending south, as a tougher pricing environment for its computer memory products and macro developments (mostly the supply chain issues behind a lack of non-memory components which has led to some customers cutting back on memory and storage purchases) have had their part to play in weakening sentiment.
The company’s latest move has also raised eyebrows in some quarters. Last week, the company said that over the next 10 years it intends on spending a combined $150 billion on Global Manufacturing and R&D. Needham’s Rajvindra Gill believes the plan has brought to the fore questions of “potential over-capacity issues and whether a plan like this would be a large drag on free cash flow.”
The company has explained the reasoning for the move, believing that “secular growth drivers” such as 5G and AI use cases should see increasing demand for both DRAM and NAND. As such, Gill thinks it’s a good move and that the worries are overblown.
“The current spending plan,” said the 5-star analyst, “When annualized and put into context, is nothing out of the ordinary and should neither cause significant increases in industry capacity (so there should be no resulting price wars from the competition) nor be a significant drag on free cash flow, which would continue to grow and reach historical highs as a % of sales.”
Gill agrees with the company’s belief in continued demand for DRAM and NAND based on the aforementioned “secular drivers” and with the help of SEMI data, estimates that over the next 10 years, Micron’s capacity would climb at a CAGR of 2.1%, which “should not be a cause for alarm of over-supply.”
In fact, Gill thinks the company will have enough free cash flow to provide it with a “high level of capital return flexibility,” which during cyclical sell-off periods, for example, could see the company repurchase shares. Additionally, should the need arise for “competitive reasons,” it will also provide a “safety buffer” for more R&D or CapEx spending.
To this end, Gill reiterated a Buy rating for MU stock backed by a $130 price target. Investors are looking at returns of 90% from current levels. (To watch Gill’s track record, click here)
14 other analysts join Gill on the bull list and with another 6 Holds and 1 Sell, the stock has a Moderate Buy consensus rating. While the average price target is not as optimistic as the Needham analyst’s, at $96.09, the figure could still provide gains of 40% over the 12-month timeframe. (See Micron stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
