Micron shares have finally bottomed after a year of steep losses and should perform better than the broader stock market in 2019, according to BMO Capital Markets.
Analyst Ambrish Srivastava upgraded the beaten-up memory stock to outperform from market perform Monday, telling clients that the brokerage’s thesis on Micron has changed as shares cheapened as well as amid expectations for better business fundamentals and cost cutting. The analyst set a 12-month price target of $50, representing more than 50 percent upside from Friday’s close.
“Our reversal in thinking is driven by a combination of the following two factors: valuation and a structurally more profitable company, which will lead to free cash flow generation even under rather dire scenarios that we are modeling for,” Srivastava wrote.
Micron, which produces memory technology such as DRAM and NAND flash — key components in popular solid-state drives — has had success in playing catch-up against larger rivals including Samsung and SK Hynix, the analyst added.
“We estimate that vs. the prior peak, Micron’s cost structure is better by about $2 billion,” Srivastava wrote. “The company has also managed to close the gap in margins vs. the larger rivals. We estimate the gap to be lower from 9 percentage points to about 6 points. Micron has been able to reduce its cost faster than the rivals.”
From a valuation perspective, chipmakers saw their equity soar in 2017 and quickly reverse in 2018 as investors followed a roller coaster ride of interest in cryptocurrency. Valuations also gyrated over the last two years amid lofty expectations in artificial intelligence, machine learning and autonomous driving promised long-lasting demand for semiconductors and equipment.
Micron, which saw its stock price rise more than 80 percent across 2017, lost more than 22 percent in 2018 amid rockier trading and a pullback in popular technology stocks. The stock was up 1 percent in premarket trading following the BMO upgrade.