Technology

Why Micron May Have 5 Times More Upside Than Downside

Chris Lange

Published: December 18, 2015 10:40 am

Last Updated: January 13, 2020 3:56 pm

Despite having a dismal year, Micron Technology Inc. (NASDAQ: MU) might be turning things around with its most recent acquisition. Historically, acquisitions have greatly helped out this company, especially Elpida which boosted Micron’s stock hit all-time highs. Now Micron is making another acquisition by purchasing the remaining 67% of Inotera it does not already own. The transaction is valued at roughly $4 billion, or $3.2 billion net of cash and debt. One key analyst sees some serious upside in Micron considering this acquisition.

In order to complete this transaction, Micron also will issue $1 billion of new equity to Nanya and will pay roughly $500 million from the company balance sheet. The purchase price implies more than a 40% market premium, but it is also about 50% below the peak value from July of 2014. It’s not quite a done deal, as Micron’s press release said that it can terminate the transaction if it is unable to secure the $2.5 billion of debt on satisfactory terms. Not to mention this is still subject to regulatory approval.

Credit Suisse’s John Pitzer further delved into this investment idea in his report, in which he believes that the stock is below its strategic value and underappreciated. Credit Suisse has an Outperform rating with a $25 price target, implying upside of 73% from the current price level. On the other hand, the firm only predicts the downside to be $12, which is only 17% below current prices.

Credit Suisse does not believe that PC DRAM pricing has yet to stabilize, and the DRAM pricing decline is expected to continue into the February quarter, particularly considering the weaker seasonal demand and lower iPhone unit shipments. While fundamentals are likely to remain weak in the first half of 2016, strategic value of the company is now more relevant than ever before, particularly given China’s interest in memory technology (Powertech, ISSI and WDC investments to date, with premium of 20% to 50%) — should the market weaken further, strategic options will become more attractive for Micron and provide upside for stock.

The brokerage firm expects Micron to report fiscal first-quarter earnings per share (EPS) of $0.21, below the consensus estimate of $0.23, and fiscal second-quarter EPS in the range of $0.05 to $0.10, well below the consensus estimate of $0.24.

Shares of Micron were trading up 0.7% at $14.42 Friday morning, with a consensus analyst price target of $20.78 and a 52-week trading range of $13.50 to $35.74.