'Controversial' Micron Has 32% Downside, Nomura Warns After Asia Trip

Nomura’s Romit Shah downgraded the rating for Micron Technology, Inc. MU from Neutral to Reduce, while reducing the price target from $12 to $8.

Micron’s shares have declined 60 percent, versus a 3 percent decline in the S&P, over the last one year. Analyst Romit Shah mentioned, however, that the markets continue to hold a positive view for this “controversial” company, given the DRAM industry’s structural positioning to maximize profits.

Shah believes that Samsung’s widening technology lead will have a negative impact on Micron, resulting in share loss, higher capital spending and lower free cash flows.

Rising Production And Its Impact On ASPs

A visit to Asia revealed that major DRAM suppliers in Taiwan and Korea are not focusing on maximizing profits, but on gaining market share, Shah said. Consequently, DRAM supply is growing with producers not planning to cut production, and Dram demand continues to be weak across all end markets including PCs, mobiles and servers.

This increased production is likely to result in lower ASPs, which has not been factored into the expectations for a strong margin recovery in 2H16, the analyst pointed out.

“We believe DRAM ASPs are tracking down at least 30% for 2016, versus consensus of down mid to high teens. If DRAM ASPs decline 30%, we believe operating margins decline to the low single-digit range (vs. cons. 7%), resulting in EPS of around $0.25 (vs. cons. of $0.46) in 2016,” the Nomura report noted.

Shah expects Micron to continue to underperform until the DRAM industry cuts production.