Analysts at Goldman Sachs cooled towards US chipmaker Micron Technology Inc (NASDAQ:MU), downgrading the stock to Neutral from Buy on weaker fundamentals in the first quarter of 2019 based on anticipated price cuts on waning demand for DRAM and NAND flash memory chips.
Baird, RBC and now Goldman Sachs have weighed in on Micron recently as the prolonged surge in demand for memory chips seen in the last two years appear to be petering out.
Micron is the fourth-largest US-based chipmaker behind Qualcomm Inc (NASDAQ:QCOM), BroadcomInc (NASDAQ:AVGO) and Intel Corp (NASDAQ:INTC). Unlike its larger peers, however, the company has doubled down on the market for memory chips.
Based in Boise, Idaho, Micron is the second-largest supplier of memory chips globally, offering chips that include DRAM, NAND flash and NOR flash.
Micron’s memory chips are used to store information, in comparison to microprocessor chips made by companies like Intel, which provide computing power.
“We are not making a call on the current quarter (4QFY18E) that Micron is scheduled to report on 9/20/18; our estimates for the upcoming quarters (4QFY18E and 1QFY19E) are slightly above FactSet consensus as Micron’s results should benefit from 3QCY18 DRAM price increases that were already set with contracts earlier in the year,” wrote Goldman Sachs analysts Mark Delaney, Timothy Sweetnam and Bruno Dossena.
“We also continue to believe that the DRAM industry is improving structurally cycle to cycle (with shrinks harder to achieve, and new demand drivers like AI).”
READ: Micron Technology shares slip further after CFO says NAND chip prices are falling
However, the analysts downgraded Micron stock to Neutral as they expected the chip maker’s gross margin to decline sequentially from “4QCY18 through mid CY19.”
“Our view of margin declines is due to lower memory ASPs, both from more challenging DRAM S/D conditions and also NAND oversupply,” wrote the analysts.
“Memory downturns usually last for several quarters and can see an acceleration in price declines, as customers delay procurement to wait for lower prices when possible, causing a snowballing effect that can lead downturns to be worse than initially anticipated by investors,” they added.
The analysts pointed out that the last downturn which began in 2015 after the DRAM industry had consolidated lasted for six quarters, with “pricing falling by 50% peak to trough” and the “largest sequential ASP decline” occurring in the fifth quarter of the contraction.
Micron stock plunged 4.6% to US$41.58 in afternoon trading on a broad market pullback in technology stocks.
READ: Baird analyst slashes price target on US chipmaker Micron Technology
“On trough earnings, Micron could trade at about US$20 to US$50 depending on the severity of the downturn,” wrote the Goldman Sachs analysts.
Last week, Baird analyst Tristan Gerra slashed his price target on Micron to US$75 from US$100 and reduced his full-year earnings estimate for the shares as gross margin near a peak.
Gerra does not expect NAND flash pricing to stabilize until the second half of next year and is factoring in a “moderate” decline in the price of DRAM chips for next year.
Contact Uttara Choudhury at uttara@proactiveinvestors.com
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