We are currently doing something that majority of the financial media has apparently failed to do, actually reading the UBS report on Micron (MU). We will be publishing a complete article on the subject shortly, but it will likely get stuck in editorial for some time, so please read and share this instead, to make sure the spread of fear, uncertainty, and doubt, colloquially known as FUD, can STOP.
While we disagree with the conclusion of the report (TOP Line), here are some points from the actual UBS report that we do agree on. The report is far more positive for MU than the majority of financial media would lead you to believe.
- MU is well prepared for the downturn in the average sale price (NYSE:ASP) in both DRAM and NAND.
- MU should remain "comfortably profitable" (direct quote from UBS) and cash flow positive given even the worst case scenario painted by UBS of 50% decline in both NAND and DRAM ASP as a result of ~5% industry oversupply in both sectors.
- MU is well positioned to weather the downturn.
- The memory cycle downturn projected by UBS for 2018-2020 is more extreme than the one between 2014-2016 but much more shallow than the 2007-2009 or 2010-2012 cycles.
Above points are made by UBS in their 50 page report, not by us, but we agree whole heartedly with all accept the last one about the memory cycle. We forecast a much more moderate cycle, closer to 2014-2016 levels or better.
To be clear, the UBS price target of $35 is derived by applying a 3.5x EBITDA multiple. UBS justifies this multiple by basically saying that MU is just a stock Wall Street loves to hate, and when the ASPs for DRAM and NAND will start to come down, the market will punish MU with unjustifiably low multiples.
This is a strange position to take considering that quite literally the entirety of the rest of the report is a glowing endorsement of Micron as a company and generally has a great outlook on the memory industry as a whole.
We do have to agree that if the market continues to rate MU as if it's one step away from the bankruptcy court it may indeed trade down to about $35 per share. However, if the market adopts the outlook on MU that UBS itself is proposing, than the price target should be $70 or better.
Having read the complete report I can say with confidence that Micron's profitability and cash flow are NOT in danger, even in the worst possible industry downturn scenario. However, the stock price may indeed be beaten down. Micron is a stock Wall Street loves to hate, as is proven today when MU traded down 7% and is continuing to plunge aftermarket due to ONE negative report from UBS which in actuality is overwhelmingly positive if you bother to read past the headline on the first page.
Disclosure: I am/we are long MU.