Shares of Micron (MU) are slipping after Baird analyst Tristan Gerra downgraded the stock two notches, to Underperform from Outperform, as he now models eight consecutive quarters of gross margin and earnings per share contraction given the continued deterioration in both DRAM and NAND memory pricing.
BAIRD SAYS SELL MICRON: In a research note this morning, Baird’s Gerra downgraded Micron two notches, to Underperform from Outperform, citing the expected impact of a continued deterioration in both DRAM and NAND memory pricing. The analyst told investors that DRAM capacity is expected to increase 10%-15% in each of 2019 and 2020, in addition to 10%-15% bit growth from geometry node migrations. DRAM channel inventories are 5-6 weeks and expected to decline, he contended, adding that he models 30%-35% price reductions in 2019, with contract pricing down 8% in first quarter of 2019 and 10% in the second quarter. From a 71% gross margin peak last quarter, Gerra models DRAM gross margin to reach 50% in the second half of 2020. Meanwhile, the NAND outlook continues to worsen, with contract pricing expected to decline by a mid-teens percentage in each of the next two quarters, he noted. While supply chain expects NAND for module makers to reach cost in second quarter of 2019, the analyst models contract reaching cost late 2020. By 2021, initial NAND production from China represents an additional risk, with YMTC expected to have initial 64-layers 3D production in 2019, he argued. Given the pricing and margin concerns, Gerra slashed his price target on Micron’s shares to $32 from $75.
PRICE ACTION: In morning trading, shares of Micron have dropped about 6% to $34.68.