Why Micron Technology Inc. Shares Will Fly Near $35

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Micron Technology  (NASDAQ: MU  ) gained about 2% this morning after RBC Capital upgraded the DRAM products specialist from sector perform to outperform.

So what: Along with the upgrade, analyst Doug Freedman raised his price target to $34 (from $27), representing about 31% worth of upside to Friday's close. So while contrarian traders might be turned off by Micron's price strength over the past year, Freedman's call could reflect a sense on Wall Street that industry tailwinds give the company plenty of room to run.

Now what: According to RBC, Micron's risk/reward trade-off is rather attractive at this point. "While Micron could be viewed as a restructuring story in the near term given its many moving parts, we believe that the company's efforts to improve NAND quality should become more transparent through the next 6-12 months," said Freedman. He continued:

On the DRAM side, higher margin levels are likely sustainable given mix-shift movements, upcoming 20nm cost-downs, fundamental industry shifts in participants, and tight industry supply (low channel inventories). ... Our view remains that the memory industry is benefiting from the law of diminishing cost savings, which is expected to result in a multi-year cycle of higher revenues and operating margins in both DRAM and NAND.

When you couple Micron's red-hot stock price -- now up about 150% over the past year -- with its still-hefty debt load, however, I'd hold out for a much wider margin of safety before buying into that bull case. 

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Comments from our Foolish Readers

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  • Report this Comment On May 19, 2014, at 2:37 PM, Tgar13 wrote:

    What? I swear you give a great bull scenario and then bam! Price has run too far and it has debt so I'm not buying

    Any discussion on their future free cash flow and

    Their ability to pay off debt and buy their warrants?

    Any discussion of possible earnings per share in 2016 given multi year increase in revenue predicted by RBC and the oligopoly that has developed in the

    Memory industry?

    No! There is sadly none and this fool does not

    Give TMF readers truly Foolish Advice

  • Report this Comment On May 20, 2014, at 2:55 AM, h2nick wrote:

    So, apart from reprinting parts of the RBS press release re their MU upgrade, all this Fool has actually added is that MU has a 'still-hefty debt load'

    This is more of a link to the TMF newsletter service than an actually useful article.

  • Report this Comment On May 21, 2014, at 5:00 PM, richak28 wrote:

    Okay I closed my call options a day or 2 ago and

    expect to enter some puts soon or buy more calls

    depending on the market...

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