Micron – Demand And Pricing Declines On The Way (NASDAQ:MU)

We downgrade Micron Technology, Inc. (NASDAQ:MU) to hold after our buy rating in early April. MU is a giant memory company in the global semiconductor industry. Our job as technology analysts is to understand the market and the company’s business. In the case of MU, we love the company, but the stock might not work in the near term.

We believe MU is overexposed to the declining consumer markets: PC and smartphones. We expect significant demand headwinds in consumer markets and believe MU will feel the negative repercussions from demand declines in coming quarters. We will revisit the stock when the demand normalizes or improves.

MU is on thin ice if consumer demand continues to decline.

Currently, MU revenue can be broken down into 15% from Automotive, Industrial, and networking segments, 30% from Data Center and graphics, and 55% from PC’s/Mobile devices. MU is heavily exposed to the consumer segment of the market, and its revenue and earnings are at risk. The following slide exhibits MU’s current markets and its intentions to reduce consumer market exposure by FY2025.

It is not a matter of “if” but a matter of “when”

We believe is no longer a question of if consumer markets will decline, but when. PC and smartphone chip demand is dropping already. Chen Junsheng, chairman of Acer, which competes as the world’s 4th largest PC supplier, said in early June that the entire PC market had turned over, and the “supply exceeds demand.” Demand headwinds are manifesting in the smartphone market as well. According to IDC, worldwide shipments have already declined by 8.9% year over year in 1Q22. We expect such declines to continue and intensify with inflationary pressures. We believe MU’s exposure to the declining consumer market will cause the stock to underperform.

DRAM is not MU’s safe haven anymore

DRAM makes up most of MU’ s revenue, making up 73%, while NAND makes up most of the remaining 27%. We believe MU cannot escape upcoming demand headwinds, even with its DRAM data center business. We had previously been optimistic about MU’s prospects in the cloud business. However, we believe the declines in consumer spending in terms of PC and smartphones will cause cloud CAPEX to be cut. In turn, we believe the cut in cloud CAPEX will take a toll on MU’s DRAM revenue. We believe DRAM and cloud data centers are not immune to the impacts of the declining consumer markets. The following table shows MU’s revenue breakdown by technology/products.

We also believe pricing headwinds are underway in the DRAM market. We see price declines in DRAM products, as shown in the following graph. We believe the supply is ahead of demand. We expect the market to see demand headwinds over the next couple of quarters and downgrade the stock to hold. The following chart from Piper Sandler shows a DRAM pricing decline.

Valuation

MU is trading at $59. The stock is cheap. On the P/E basis, MU is trading at 4.6x C2023, with EPS of around $10 compared to 13.9x for the semiconductor peer group. The stock is trading at 1.6x EV/C2023 sales versus the peer group average of 4.5x. Adjusted for growth, MU is trading at 0.1x C2023 compared to the group average of 0.7x. The following chart illustrates the semiconductor peer group valuation.

Word on wall street

Market consensus on MU is an overwhelming buy. Out of the 38 analysts, the majority, 31, are buy-rated, six are hold-rated, and one is sell-rated. Growing analyst optimism is reflected in the extreme upside of the sell-side price targets presented. MU is currently trading at around $59. The sell-side median price target is $108, and the mean is $109, for an upside of 83-85%. The following chart indicates MU’s sell-side ratings and price targets:

What to do with the stock

Despite being cheap, MU does not present a favorable risk-reward situation. We believe MU will feel the impact of consumer demand headwinds because the company’s revenue is highly exposed to consumer segments. We also do not believe the cloud business can bail MU out of the upcoming demand slowdown. We expect the stock to decline or remain rangebound in the near term. We will get back to the stock when demand normalizes. Therefore, we recommend investors wait for a better entry point for the stock.