New Street Research Upgrades Micron Technology (MU) to Buy

New Street Research analyst Pierre Ferragu upgraded Micron Technology (NASDAQ: MU) from Neutral to Buy with a price target of $1,250.00.

The analyst comments "Over the years, Memory manufacturers have seen continued violent cyclicality while underlying demand grew steadily (faster than logic semiconductors!) and with a very slow but unquestionable profitability improvement, which we attribute to the slowing of capacity additions and unit cost declines driven by node transitions in DRAM, and, to some more limited extend, to the consolidation of the industry around only 3 leading-edge players today. Based on the perspective we outlined in part I and II of the series, the first column of this table shows where we think Micron stand in 2030: >$600bn in cash on the balance sheet, and >$150bn annual FCF. These would be peak numbers of course. In part III, we outlined how we’d see the cycle play out beyond 2030, which is summarized in the next two columns of this table: a trough at only $18bn FCF burn and across a 4-year downcycle, over $100bn of cash generated each year. Lastly, we would expect memory demand to grow still fast, with AI representing 2/3 of the mix. With historic memory growth averaging 10% in the last 20 years, we model 15% p.a. beyond 2030. Memory has historically traded at ~3-6x COGS through the cycle, i.e. 10-20x through-cycle EBIT, with an average Ebit of 19%, on Gross Margin of 34%) We assume traditional memory will continue to trade like this, as the fundamentals are not changing materially. However, we think HBM deserves a multiple premium, because it is structurally less cyclical than commodity DRAM. 20-30x puts HBM in line with leading other AI names (TSMC, Nvidia, Broadcom). Combining the two gives a market cap of $2.0-3.0tn in 2030, in line with 30x COGS. In the last super-cycle (2017-20), Micron's stock found a valuation floor at ~13x trough EBIT. Near-term, we expect gross margins to normalize. This could happen smoothly with no stock impact, or trigger trough fears. In that case, we’d still see the stock finding a bottom at 13x trough EBIT. In part II of the series we estimated that in the unlikely scenario of AI demand pausing before 2030, memory manufacturers would fully benefit from SCAs negotiated this year. For Micron, we estimated EPS would trough at $23."

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Shares of Micron Technology closed at $949.83 yesterday.

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