UBS Does a U-Turn on Micron

UBS has admitted that its bearish assessment of Micron Technology Inc. (MU). last week was slightly misjudged.

In a research note, reported on by Barron’s and MarketWatch, analyst Timothy Arcuri upgraded his rating on the shares to neutral from sell, less than one week after warning that the chipmaker faced a “big correction” in 2019. In his latest update, Micron bear Arcuri admitted that the company generated better profits during the downturn in memory chip prices than he’d previously estimated, prompting him to reassess his outlook for the dynamic random-access memory (DRAM) market and raise his price target on Micron's shares by 43% to $60. (See also: Micron Faces 'Big Correction' in 2019: UBS.)

Even though prices for memory chips are falling, the analyst is now confident that Micron’s "more proactive approach to capacity" should ease the pressure on the company’s gross profit margin. This observation, coupled with management’s pledge to spend $10 billion over the next few years repurchasing stock, means that Arcuri is now confident that Micron can generate between $7 to $10 per share, rather than the $3 to $6 per share that he previously forecasted.

"Major producers are taking a more anticipatory approach to DRAM [dynamic random-access memory] bit supply - averting the downside case that we laid out when launching Micron" with a sell rating in April, Arcuri wrote. "While we maintain fairly draconian views on NAND pricing and 2H recovery seems unlikely, these dynamics force us to reconsider the downside case for MU especially considering our long-term bullish demand view."

Despite admitting that his initial take on Micron’s third-quarter results was overly harsh, Arcuri still maintains that he was right not to follow other brokerages in advising UBS clients to buy the shares. While the DRAM pricing environment might be better than first feared, the analyst warned that the outlook for NAND remains grim and that gross margins are likely to come under pressure as the company’s industry leading cost-cutting efforts slow.

“Even with a much less draconian assumption for DRAM pricing (our NAND assumptions are unchanged), we still think MU has company-specific cost challenges that are going to result in some gross margin compression through C2019 and into 2020,” he wrote. “Cost downs – which have been better than industry for the past few years – are going to slow considerably in C2019 and C2020 in both NAND and DRAM (due to 1y transition). Actions by Samsung do not prevent MU gross margins from compressing, they simply change the magnitude of the compression.” (See also: Will DRAM Supply Dictate The Future Of Micron?)