The reemergence of the US-China trade tussle could be bad news for several US companies.
Chipmakers are particularly dependent on a good working relationship, deriving a large chunk of business from China. Micron (MU) is no different. In fact, before Chinese tech giant Huawei was added to the US Entity List, it accounted for 13% of sales, now the figure lands at just under 10%. With this in mind, a new US Commerce Department directive to halt the shipment of US semiconductors to Huawei could possibly add more fuel to the fire.
However, following a virtual fireside chat with Micron’s Director of Investor Relations, Needham analyst Rajvindra Gill reports “the current sanctions against Huawei won’t materially impact its current relationship with the company.”
The 5-star analyst further added, “Regardless of the changes, we believe Micron will still have the ability to qualify and ship new memory products to Huawei as well provide warranty support and sell products from its manufacturing plant in the U.S. (albeit very small portion)… Separately, we believe management is taking a cautious approach for the C2H20 as visibility into key end markets, such as mobile, consumer and data center remain limited.”
That said, despite the uncertainty, Gill believes there are enough tailwinds working in Micron’s favor. First of all, with the company on track to move a considerable amount of its NAND capacity to second-generation Replacement Gate, NAND gross margins should inflect and recover in FY21, which begins November 2020.
Elsewhere, considering the current “semi-permanent nature of the stay-at-home economy,” hyperscaler, server and graphics demand trends remain healthy with no signs of deceleration.
Additionally, Gill argues earnings volatility is likely to reduce as Micron’s current inventory situation is better than it was a year ago.
Lastly, and importantly, Gil maintains that Micron is undervalued. “Net, the shares are trading at approximately 1.4x its current tangible book value, still well below its median 1.7x-2x multiple range, making the shares relatively inexpensive at current levels,” he stated.
Accordingly, Gill keeps a Buy rating on Micron shares and attaches a $63 price target. What can investors expect should Gill’s model materialize? Upside of 35%. (To watch Gill’s track record, click here)
Looking at the consensus breakdown, Micron has a Moderate Buy consensus rating, based on 19 Buys, 5 Holds and 1 Sell. The analysts see share price appreciation ahead, as the average price target of $62.53, implies upside potential of 34%. (See Micron price targets and analyst ratings on TipRanks)
