The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology  – Senior Analyst at I Know First. 

Micron Stock Prediction: Summary

• Oversupply has caused DRAM prices to plummet this second half of 2015.
• Micron’s -55% YTD drop is understandable since two-thirds of its revenue comes from DRAM sales.
• I opine that cheaper DRAM modules could be negated by higher volume purchases from PC and mobile device manufacturers.
• Most new computers now come with a default load of 4GB of RAM. Mid-range $300 smartphones now also come with 4GB of RAM.

It is easy to understand why Micron (MU) saw its stock price suffer a -55% YTD decline this year. Average spot prices of DRAM has significantly dropped since June. Based on the chart of DRAMeXchange below, the bearish mood over MU right now is justified.

(Source: Motley Fool/DRAMeXchange)

Micron gets two-thirds of its revenue from sales of DRAM products. The big 30-40% drop in DRAM spot prices signify that there is now an oversupply that’s only getting to get worse. It appears that SK Hynix has recovered from the fire incident that helped propel record DRAM prices in 2013. The oversupply of DRAM could certainly be attributed to SK Hynix back to full production capacity again from its repaired factories.

Oversupply Will Not Last Long

Gartner has predicted that the DRAM industry is going to hit new lows in 2016. Gartner even warned that a repeat of the 2012 crisis (that saw DRAM spot prices hit $1) might happen again. This scary scenario that Gartner is disseminating will no doubt contribute to further negative outlook for Micron.

On the other hand, I am confident that the bust cycle for DRAM players like Micron will not be a permanent thing. The three remaining DRAM players, SK Hynix, Samsung (SSNLF), and Micron will eventually (quickly) cut down their production to help prop up prices. It is my firm belief that when there are only three firms involved, a mutual agreement to cut supply is easier to achieve.

All three firms have compelling reasons to see the oversupply situation fade away as soon as possible. Every one of them could lose billions of dollars in annual sales if they do not cooperate to stop the decline in DRAM spot prices. The average price 4GB DDR3 DRAM (the default in new laptops and desktop PCs) is now below $2. It was above $2.50 last June.

Cooperative reduction in DRAM supply between SK Hynix, Samsung and Micron justifies my argument that battered down MU is a bet worth making now. The analysts and industry observers like Gartner might become bullish again on Micron once they realize that the low prices of DRAM will not linger for years.

Investors will likely prop up Micron again once DRAM prices recover after supply equalizes with market demand. I am hoping that PC sales will recover next year once more PC vendors starts selling affordable touchscreen-enabled hybrid Windows 10 tablet/laptops and desktop PCs.

Mobile DRAM Sales Continue To Grow

My positive long-term outlook for Micron is also helped by the fact that it might eventually regain the Apple iPhone business next year. The investors who dumped their MU shares this year definitely got disappointed that the new 2GB LPDDR4 RAM of the iPhone 6s and 6s Plus are no longer from Elpida, but from Samsung and SK Hynix.

Micron should do its best in attracting more customers for its LPDDR4 mobile DRAM. Unlike the declining PC market, the mobile smartphone/tablet products are still posting surging sales. Micron was one of the earliest promoters of the LPDDR4 mobile DRAM. It offers the same 20nm energy-efficient LPDDR4 mobile DRAM that Samsung put inside the iPhone 6s.

(Source: Micron/AndroidAuthority.com)

Micron is still a far-third when it comes to mobile DRAM sales. It therefore still has further room for growth. Hopefully, Apple will again use Micron’s mobile DRAM for the iPhone 7 products next year. Micron’s market share in mobile DRAM slight dropped from 16.5% to 15.3%, which is likely partly due to the iPhone 6s non-usage of Micron’s memory.

The Q3 2015 report from TrendForce said smartphone demand helped increase Q3 mobile DRAM sales by 18%. Mobile DRAM sales were also up 7% in Q2. I believe the continuing demand for smartphones will help continue this trend for many years to come.

Micron’s future might be better if it doesn’t too much on being a key supplier to iPhones. It should also work harder in getting supply contracts from Windows and Android smartphone manufactures like Asustek. Asustek is the first phone vendor to sell 4GB RAM-equipped Android phone earlier this year.

The $300 Asus ZenFone 2’s 4GB RAM forced other OEMs to also release 4GB RAM-equipped phones. Supplying LPPDR4 memory to $300 Android phones is one way Micron could replace the lost business from the iPhone 6s.

Let us also remember that Micron was again the first firm to release an automotive-grade LPDDR4 memory. The rise of the smart or connected car concept will eventually require manufacturers to equip their next-generation cars with fast enough DRAM.

My Takeaway

MU is a Buy. Investors should not fear the news that Intel (INTC) was investing $5.5 billion in converting its Dalian China chip to make memory chips. Let us not forget that the 3D XPoint non-volatile memory technology is a shared IP of Intel and Micron. As explained by Mr. Chris Mellor, the Dalian conversion to memory chip production could actually help Micron save money.

I believe that Micron and Intel will continue to cooperate in monetizing 3D XPoint. The Micron insider that Mr. Mellor interviewed said:

(Source:The Register UK)

My buy recommendation for MU is supported by the positive long-term algorithmic forecasts for Micron. I Know First’s chart below shows MU has positive market trend scores for 30-days, 90-days, and one-year projection period. The One-Year 35 market direction score indicates that self-learning algorithm expects MU to increase in price after one year.
The bottom 0.44 score denotes confidence level over the accuracy of the prediction. The higher the bottom score, the more confident investors should be to trust I Know First’s forecast.

The bullish algorithmic forecast of I Know First is also in line with the multiple Buy recommendations that Wall Street analysts have for Micron right now. Out of the 24 professional analysts that TipRanks tracked, 19 of them rated MU a buy as opposed to only 2 who called for a Sell on Mu.

Their average 12-month price target for MU is $21.74. Micron’s current stock price is only $15.50.

(Source: TipRanks)