Is Micron Technology (MU) making a comeback? Or is this just catch up? It looks like a major turn could be occurring with not just one, but several, product lines doing better. Hence, two upgrades this morning: one from Susquehanna and another from Nomura, and both seem very cogent.
Now remember that we have been in a mini bull market for a bunch of old- and new-line semiconductor stocks, namely Texas Instruments (TXN), Nvidia (NVDA) and Broadcom (AVGO). Lately, however, we have seen tightening in pricing for DRAMs and Flash memory, with the former actually moving higher after about a 50% decline in pricing over the last two years.
That decline comes after consolidation in the business was supposed to drive pricing. But with the collapse of the personal computer business into double-digit declines it didn't seem to matter.
Now inventories have been worked off, and you could get a radical swing in pricing that would give you much-higher earnings, hence a Susquehanna price target increase from $10 to $18 -- quite a move for a $13 stock. Nomura notes that instead of expecting a $0.02 gain in the coming quarter, it now believes the company can earn $0.05.
That would be quite a move from this ultimate commodity semiconductor play, which peaked 18 months ago, at $36, after being one of the best-performing stocks in the S&P 500.
I love Nomura's positioning on this upgrade. The firm is recommending what we call a barbell strategy of buying the highest-growth companies. And here, again you've got Applied Materials (AMAT), Broadcom, Nvidia and Texas Instruments, as well as the battered and beaten down -- like Micron.
If you believe in that strategy, you might want to consider fellow traveler Western Digital (WDC). Earlier this year, Western Digital purchased Sandisk, the premium maker of flash chips, for $16 billion, in a deal that many at the time thought to be a severe overpay.
You can't possibly think that now, with a tightening in flash, especially because Western Digital's core disk drive business seems as bedraggled as ever. Western Digital has been expected to earn $5 and pays out about a 4% yield, but I think that most analysts didn't think that the $5 was really doable. If it is, then lookout above, as this $50 stock could see $60.
Now, I want to be sure everyone understands this call for what it is worth. The semiconductor and related companies that have been winning huge --notably, Applied Materials and Lam Research (LXRI) on the equipment-to-build side, and Broadcom and Nvidia on the communications and graphics side -- are proprietary in nature, meaning that they don't need a strong economy or a turn in the personal computer cycle to rally.
That's not the case with Micro or Western Digital. Both have been moving up, of late, so these upgrades aren't exactly at the forefront of the turn. That said, though, they are really beaten down. So the trade seems like a very good one -- and one that can last at least through a couple of reporting periods.
I personally favor the stock of NXP Semiconductor (NXPI), which is more of an Internet of Things (IoT) company, levered to the car more than the personal computer. NXPI is an Action Alerts PLUS portfolio holding.
That said, when Micron and Western Digital catch a bottom in pricing, that's not going to go away in 90 days.
That's why I think both MU and WDC are buys -- at least for another 10%. At that point, you have to say, okay, where's the new supply going to come from -- everywhere -- and where's the demand going to come from -- not sure.
So don't get carried away, but when two firms recommend, there is something there -- something worth grabbing.