When you're really excited about a stock, it's always a good idea to know the other side of the argument. It can be hard to turn a negative eye on something you find appealing, but giving the bear side its due can help avoid huge traps in the investing world.
That's why it was so interesting to see the recent change of heart by UBS semiconductor analyst Timothy Arcuri on Micron Technology (NASDAQ:MU). Micron's stock has been soaring, up nearly 90% over the past 12 months as of this writing and nearly 30% on the year. Analysts have been almost uniformly bullish, with price targets as high as $120 per share, more than double the current price. Going against the crowd, Arcuri had been the only analyst with a sell rating, sticking a lowly $35 price target on Micron when he initiated coverage back in April.
Following Micron's third-quarter earnings report on June 20, however, Arcuri raised his target to $42, then all the way to $60 less than a week later, changing his rating to "hold." That's a big change in a short amount of time. So, what made this lone bear have a bullish change of heart?
The bear case for Micron
Micron is a memory stock that produces DRAM (computing memory); NAND flash (storage memory); and 3D Xpoint, a new type of memory set to be unveiled next year. Traditionally, the industry has been very cyclical, as prices for these commodities have fluctuated based on constantly moving supply and demand.
However, the demand for cloud computing, artificial intelligence, and "smart" devices has caused memory demand to explode. At the same time, supply has been constrained, with only three major DRAM suppliers and six NAND flash suppliers surviving the cycles of the past. As Micron has continued to mint earnings records this year, most analysts agreed with Micron CEO Sanjay Mehrotra's assessment that the memory industry is now "structurally different."
But not Arcuri, who believed cyclicity was still very much alive and well. Specifically, Arcuri had feared a wave of huge supply coming from memory giant Samsung (NASDAQOTH:SSNLF), writing in April, "we just saw peak EPS guidance and think MU is [about] 2Qs away from a cycle of potentially significant estimate cuts primarily due to a near-term wave of DRAM supply."
DRAM provided 71% of Micron's revenue last quarter, so a hit there is worth worrying about.
However, it appears two recent developments have caused Arcuri to change his mind.
Q4 guidance blew the doors off
It turns out we hadn't seen "peak" EPS guidance. Micron wound up with earnings per share of $3.15 in its third quarter, a record quarter for the company, while also guiding to an even higher $3.23 to $3.37 for the fourth quarter.
In addition, Arcuri came around to the belief that Samsung may not increase its supply of memory as much as he'd expected, writing that "timelines for this entire [roughly] 60-65k wsm [wafer starts per month] that was originally planned to be installed before [year's end 2018] have been pushed well into 2019 with an associated lag in bit production."
There could be several explanations for Samsung's delays, both of which are bullish for memory stocks in general. Perhaps the three industry DRAM players are acting more rationally (as in, not overbuilding capacity ahead of demand), or Samsung is having trouble scaling up capacity. That could speak to the additional problems in increasing bits per wafer going forward, signaling a slowdown in Moore's Law (which states that bits-per-wafer efficiency doubles every two years).
Whether supply is constrained intentionally or by technological difficulty, it's bullish for memory pricing, which should theoretically even out the future memory cycle.
Arcuri now expects Micron's "trough" EPS to be roughly $7, up from his previous estimate of $3. For perspective, Micron has earned $9.97 in EPS over the past four quarters, and analysts expect this to expand to $11.77 EPS by the end of the fiscal year.
A battleground becomes friendlier
Micron has been a battleground stock, with wide disagreement among analysts and investors as to whether we are at peak memory pricing, and if so, how severe the downturn will be. You can see this reflected in 2019 analyst earnings estimates, which range from $8.74 all the way to $14.97.
However, with the lone "sell" on the Street throwing in the towel, and with all analyst estimates now above the current stock price, the consensus on near-term memory pricing seems to have solidified on the bullish side.