Semiconductors, which are the backbone of the current-day technology-driven economy, are being driven by digitization across industries. That increases demand for memory chips and the adoption of cloud computing.
The memory-chip maker Micron Technology (MU) benefitted from the above-mentioned factors, reporting strong profits in Q3FY21. The company also witnessed year-over-year growth across metrics, driven by strengthening demand across its end-markets and an improved pricing environment. (See Micron stock chart on TipRanks)
Following the earnings release, Sidney Ho of Deutsche Bank maintained a Buy rating and a price target of $110. This reflects a potential 12-month upside of 36.9% from the Friday closing price of $80.33.
Notable Factors
Ho’s concerns related to the pricing environment have been alleviated to some extent. Positive factors include Micron’s strong Q3 earnings results, upbeat projections for DRAM and NAND bit demand growth, and management’s commentary regarding strong demand environment in its end markets. Ho now expects a more favorable pricing environment for both DRAM/NAND in the near term.
Furthermore, the analyst noted that data center demand is expected to pick up in the second half of 2021, given the strong need for cloud services and an improvement in the enterprise spending environment.
Ho also seems to be impressed with the potential upsides to Micron’s memory demand in the near term. Moreover, the analyst referred to the company’s growing embedded businesses, applauding the strong performance of automotive and industrial business in the fiscal third quarter.
Caution Remains
However, Ho was mindful of potential risks to the company such as increasing costs and the impacts of rising COVID-19 cases on MU’s manufacturing operations.
The analyst expects Micron to face some cost-related worries in fiscal 2022, stemming from the company’s decision to focus more on advanced and higher-value products. At the same time, Ho hopes these new products help the company expand profit numbers going forward. Also, the company’s decision to take necessary steps to ensure sustainability across its supply chain is expected to trigger an upswing in expenses, the analyst noted.
Ho mentioned that the company expects gross margins to remain under pressure in the upcoming quarter. This could ultimately impact the profit numbers of the company.
Further, the analyst remains concerned about the increasing COVID cases in the Asian countries namely Malaysia, India and Taiwan. He is of the opinion that the reduction in workforce due to COVID-related panic in these countries could hamper Micron’s manufacturing operations and eventually lead to reduced output.
Valuation Warranted
In all, Ho commented that though MU’s stock is trading at a premium, the valuation remains reasonable, given “a healthy demand environment across end markets and a pricing environment that is still trending positive for both DRAM and NAND.”
On TipRanks, MU has an analyst rating consensus of Strong Buy, based on 15 Buy ratings and 5 Hold ratings. The average MU price target is $118.65, reflecting a potential 12-month upside of 47.7%.
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.
