Cowen sees 5G phones "quickly soaking up" excess memory inventory as Morgan Stanley upgrades Micron, Western Digital
Shares of Micron (MU) and Western Digital (WDC) are on the rise on Thursday after Morgan Stanley analyst Joseph Moore upgraded both stocks to Overweight, a Buy-equivalent rating. The analyst noted that memory prices started to stabilize six months ago, but the "notable difference" in mentality from memory buyers that he sees has belatedly convinced him that the pricing strength can persist.
BUY MICRON, WESTERN DIGITAL: In a research note to investors, Morgan Stanley's Moore upgraded Micron to Overweight from Equal Weight with a price target of $73, up from $56, and upgraded Western Digital to Overweight from Equal Weight with a price target of $88, up from $64. While he did not expect memory fundamentals to bottom this quickly, his checks make it clearer that customers are "building real conviction" that memory will tighten over the course of 2020, Moore said. The analyst noted that memory prices started to stabilize six months ago, but the "notable difference" in mentality from memory buyers that he sees has belatedly convinced him that the pricing strength can persist.
Moore has more conviction that NAND can remain strong versus lower conviction in DRAM. But if DRAM margins bottom out now, even if the recovery is not "V shaped," the shallowness of the downturn is unprecedented, following the unprecedented upside of the 2017-2018 upturn, he contended. Further rerating of memory stocks seems fairly likely, the analyst added, given what the rest of the semiconductor space has done.
Meanwhile, his peer at Wells Fargo raised his price target for Western Digital to $83 from $70 ahead of quarterly results to reflect upwardly revised NAND Flash pricing and gross margin expectations, the company's positive comments on returning to a more optimal mix of NAND Flash bit shipments across its portfolio, and his checks suggesting that Western Digital has not ceded significant capacity ship share in high-cap/nearline HDDs. Analyst Aaron Rakers has an Overweight rating on Western Digital's shares.
5G LAUNCHES 'SOAKING UP' INVENTORY: Cowen analyst Karl Ackerman's field work across the memory supply chain indicated entry level configurations of DRAM and NAND are 50% and 100% higher, respectively, for premium tier 5G handsets launching this year from Samsung (SSNLF), Huawei and Apple (AAPL). This is causing supply tightness and should put upward pressure on average selling price contracts, Ackerman told investors in a research note of his own. The analyst sees Micron and Silicon Motion (SIMO) as the largest beneficiaries, though he noted that Western Digital is also well positioned.
While investors generally understand new smartphone launches should reduce excess memory inventory, many do not yet fully appreciate the incremental memory content on new 5G flagship launches in 2020, Ackerman contended. He thinks 5G smartphone build plans are "quickly soaking up excess inventory" that should accelerate demand and enable revenue and profitability to materially improve for memory providers the next few quarters.
PRICE ACTION: In late morning trading, shares of Micron have gained about 1% to $59.66, while Western Digital’s stock has advanced over 3% to $70.83.