Ahead of Micron Technology Earnings, Why Credit Suisse Sees 40% Upside

Micron Technology Inc. (NASDAQ: MU) is scheduled to release its most recent earnings report after the markets close on Thursday. Over the past year, Micron stock has more than doubled, noting a solid earnings performance during this period. So it is no doubt that there are some analysts that are growing very bullish on this semiconductor manufacturer ahead of its earnings report. 24/7 Wall St. has taken a look at a report from Credit Suisse ahead of earnings and provided some of the key highlights.

Keep in mind that analysts often make calls ahead of earnings, but this looks like one of the more aggressive stances for a company that has rallied massively over the past year.

Credit Suisse has an Outperform rating and raised its price target to $35 from $30. The firm expects fiscal second-quarter earnings of at least $0.86 per share and $4.65 billion in revenue, well above original guidance of $0.63 per share and $4.53 billion, albeit in line with current Wall Street estimates.

Thomson Reuters consensus estimates call for $0.84 per share in earnings and revenue of $4.64 billion. The same period of last year had a net loss of $0.05 per share and $2.93 billion in revenue.

The brokerage firm also expects Micron to guide fiscal third-quarter earnings to a range from $0.95 to $1.05 per share and $4.71 billion to $5.01 billion in revenue and modestly better than the consensus.

Credit Suisse highlighted the following in its report:

1) While Average Sales Prices (ASPs) continue positive, upside to F2Q/F3Q is being driven by better costs-downs and margin expansion. Specifically, we expect F2Q gross margin of 37.5% up 1,150 basis points (bps) quarter over quarter (q/q) and 500 bps above original guidance driven by DRAM/NAND cost reductions of 10%/13% q/q versus our original expectation of 5%/8%. We expect F3Q gross margin of 40.0% based on DRAM/NAND q/q cost-downs of 2% and 4%, respectively.

2) Closing the cost gap with Samsung should drive multiple expansion. Historically Micron has been a levered play on memory, but a structural laggard in DRAM/NAND costs. We see F2Q margin upside as evidence MU is closing the cost gap. While DRAM 20nm costs downs slow in second half of the calendar year (20nm now 60% of DRAM capacity), continued mix towards 3D-NAND (NAND 34% of Rev, 3D 43% of NAND) should provide margin cushion.

3) Our industry supply/demand model points to tight DRAM thru 2017, tight NAND thru at least the calendar third quarter of 2017. Our calendar year 2017 DRAM/NAND year over year (y/y) bit growth of 18%/40% still valid despite the possibility of incremental capacity – our upside case for DRAM/NAND y/y bit growth is 20%/50%. While pricing trends may begin to level off, even against our upside bit growth, we would expect MU margins to expand throughout the year.

Shares of Micron were trading up 1.6% at $25.93 Wednesday afternoon, with a consensus analyst price target of $32.79 and a 52-week trading range of $9.35 to $26.61.