Summit Research Positive on Micron (MU); Sees 2nd-Half DRAM Shortages and Sees Investment from Google or Others

Summit Research analyst Srini Sundararajan reiterated a Buy rating and $50 price target on Micron Technology (NASDAQ: MU) citing likely DRAM shortages in the 2nd-half of 2015 and the view that at least on hyperscale client will likely invest in MU stock (GOOG, AMZN, AAPL).

From the Note:

Amidst Likely DRAM Shortage in 2H15….: C2Q continues to be haunted by weak PC growth and PC DRAM (30% of MU’s total DRAM sales) weakness. However, the good news on PC DRAM is that probably the worst is over, as ODMs are lean, having burnt inventory even amidst low 1H15 sell-through. Hence, we think, ODMs will have to replenish PC DRAM in 2H15 due to Windows 10 release prior to the back to school season. Additionally, signs are emerging that mobile DRAM demand has also recovered from its 1Q15 funk which was exacerbated by reduced smartphone demand in China during that period. One exception: amidst all this, datacenter/server DRAM demand has been, simply put, “gangbusters” throughout and continues to be for the foreseeable future. Potential 2GB DRAM capacity of iPhone and greater capacity for an iPad Pro in addition to the mobile DRAM needs of Xiaomi, LG and of scores of Chinese and Indian vendors will not help any, with Android ecosystem needing at least 3GB to 4GB DRAM per device to match the performance of 2GB DRAM on iOS. Netnet, therefore, the prospects for inadequate DRAM supply in 2H and beyond have increased significantly.

…..For Good Reason, At Least One Hyperscale Client Likely to Invest into MU Stock: Given the prospects for a DRAM shortage, we feel that it makes sense for hyperscale clients to nurture at least one non-South-Korea based DRAM vendor. Both seismic as well as conflict related manufacturing interruption fears exist for South Korea based DRAM manufacturing. Amidst an overall DRAM shortage, given red-hot demand for server DRAM, it is but likely that going forward, server DRAM capacity might have to be reserved, similar to mobile DRAM being made to order. Hence, we feel that hyperscale clients of MU such as Google, Amazon, Apple etc. might have to show increased commitment and incentivize MU to make server DRAM that may be optimized for their particular needs. These hyperscale clients operate in somewhat fickle mega-markets where tastes can rapidly change…the reason why Google came up with a likely computation and communication intensive Google Instant despite no immediate threat to its dominance. Furthermore, some of these hyperscale clients such as Google are also working towards making a driverless connected car with special DRAM intensive needs and clearly, Google’s competition (Apple, Tesla amongst possible others) is now waking-up.

Therefore, we think that it is highly likely that hyperscale clients such as Google might consider investing in an equity stake in MU (similar to the way that the biggest microprocessor manufacturer showed commitment by investing in its lithography vendor to incentivize EUV development). We estimate that a potential investment, if it happens, might involve less than 10% of MU’s total shares However, such a vote of confidence would be extremely bullish for MU’s stock. The advantage to the hyperscale client might be that they may be able to strike a cost-plus pricing model to avoid paying full margin while guaranteeing supply.

For an analyst ratings summary and ratings history on Micron Technology click here. For more ratings news on Micron Technology click here.

Shares of Micron Technology closed at $25.02 yesterday.

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