Jefferies: Micron-Tsinghua Bid Reveals 'Discount Valuation'

In a report published Tuesday, Jefferies analyst Sundeep Bajikar maintained a Buy rating and price target of $36 on

. The Wall Street Journal has reported that China's state-owned firm, Tsinghua Unigroup, intends to make a bid of $21 per share for Micron Technology. "Such a bid would be consistent with our thesis that 1) MU is deeply undervalued at current levels, 2) DRAM and 3D NAND manufacturing technologies are strategic for China but difficult to access, and 3) Micron's technology positions in DRAM and NAND (esp. 3D NAND) are likely to improve significantly over the next 12 to 18 months," analyst Bajikar stated. The analyst believes that DRAM would continue to be essential for almost every type of smart mobile device, as well as for data center infrastructure, for many years to come. On the other hand, 3D NAND is likely to replace planar NAND in almost all major applications in the forthcoming years. However, according to the Jefferies report, "Leading-edge high volume memory design and manufacturing IP is closely held by a handful of companies, none of which we think would want a new entrant from China to affect supply/demand fundamentals unfavorably." This means that while China aspires to domestically source semiconductor components, DRAM and 3D NAND would be difficult for the country to access. "We wouldn't be surprised if there were regulatory hurdles in a potential acquisition of Micron by a Chinese entity," analyst Bajikar said. On the other hand, the analyst expects Micron Technologies' competitive position in the 3D NAND and DRAM markets to improve significantly, going forward. DRAM prices are also expected to stabilize in 2H15. "Our conversations suggest panic selling and a short term investment focus have driven a sharp valuation discount that is ignoring a potential recovery in DRAM fundamentals," analyst Banjikar added.