Micron Technology shares have been moving higher the past few months, driven by growing investor anticipation of improving pricing for memory chips generally, and DRAM in particular. The stock has rallied close to 50% since Barron’s laid out a bullish outlook for the business in a Tech Trader column in the Nov. 16 issue. And there is reason to think that the rally is far from over.
In an aggressively bullish note on Wednesday, Citigroup analyst Christopher Danely reports that demand for DRAM is running better than he had previously expected. Danely—who turned bullish on Micron in early January—sees DRAM pricing increasing throughout the current calendar year given increasingly tight supplies, a trend he doesn’t see lifting soon.
Danely argues that Micron (ticker: MU) can reach peak earnings of $15 a share or more. The current Wall Street analyst consensus calls for profits of $3.55 for the company’s August 2021 fiscal year, and $4.91 for fiscal 2022.
Danely thinks the estimates are far too low. He sees profits of $3.62 a share in the current year, $10.64 a share in fiscal 2022, and $15.83 a share in fiscal 2023.
“We expect the upside to DRAM pricing to last all year driven by the supply/demand imbalance,” the analyst writes in a research note. “We would note it takes roughly six months for an increased capex number to filter down to production, so even if the DRAM companies raise capex—it will not impact supply until the summer at the earliest.”
He adds that since 2001, Micron’s margins have been consistently seeing higher highs—and higher lows. He thinks gross margins in the current cycle can peak at 65%, from a trough of 31.5% in calendar 2020.
Danely adds that he thinks the DRAM upturn—which he says really began just a few weeks ago—can last one to two years. “We also believe the desire of the three DRAM companies [the others are Samsung Electronics (005930.Korea) and SK Hynix (000660.Korea)] to maintain the upturn for as long as possible should keep a lid on supply growth,” he writes. He sees industrywide capital spending to be up 5% in 2021 to $12.3 billion, “roughly 23% below peak capex of $15.9 billion in 2018,” due to Samsung’s reallocation of capital spending from memory to its foundry business.
The analyst points to multiple drivers to the strong demand environment. He expects calendar 2021 DRAM demand growth to be up 37% in the server market, with 21% from PC makers, and 12% in the handset market.
Micron shares were down 1.6%, at $86.34, near Wednesday’s close. The S&P 500 was down fractionally.
Write to Eric J. Savitz at [email protected]
