On Thursday, UBS adjusted its price target on shares of Micron Technology (NASDAQ:MU) to $153.00 from the previous $155.00 while sustaining a Buy rating on the stock. This change follows the company's recent financial performance and future capital expenditure forecasts.
Micron's guidance was characterized as somewhat cautious, and commentary on the first fiscal quarter (November) gross margin did not meet expectations. However, UBS believes these issues are minor and that the gross margin will continue to rise through most of 2025, which is deemed crucial for the stock's performance.
Despite the guidance falling short of investor expectations, the third fiscal quarter earnings per share exceeded the high end, suggesting a conservative forecast. The modest increase in the first fiscal quarter gross margin was unexpected, given the current supply and demand balance, but UBS attributes this to the challenges in ramping High Bandwidth (NASDAQ:BAND) Memory (HBM) production and the company's strategy to allow for potential errors.
For fiscal 2025, the projected capital expenditures are substantially higher than anticipated. Nevertheless, UBS expects free cash flow to increase significantly. The firm compares Micron's spending pattern to that of Texas Instruments (NASDAQ:TXN), suggesting it is a strategic move to utilize funding from the CHIPS Act for constructing new facilities.
UBS has revised its earnings per share estimates for Micron for calendar years 2025 and 2026, reducing them by approximately 10% and 14%, respectively. The price target adjustment to $153 reflects a more conservative outlook on gross margins. Despite these changes, UBS maintains its Buy rating, citing Micron as one of the top artificial intelligence plays in the market. The favorable supply and demand dynamic is expected to continue, as non-HBM products, which will constitute the majority of the company's revenue even in 2025, are projected to see little to no supply growth.
In other recent news, Micron Technology disclosed notable financial results that exceeded market expectations. The company's fourth-quarter revenue projection of $7.6 billion matched average analyst predictions, driven primarily by the sale of its high-bandwidth memory chips. Barclays maintained an Overweight rating on Micron shares, setting a price target of $145, while Stifel and Mizuho Securities held their Buy ratings with targets of $165 and $155, respectively.
Micron anticipates a significant revenue increase from its high-bandwidth memory (HBM) opportunity, potentially exceeding a $600 million run rate, a substantial jump from the greater than $200 million in the fourth quarter. However, Barclays expressed some uncertainty regarding Micron's ability to estimate the HBM market size and share opportunity, particularly without a third competitor in the market.
Despite a recent dip in Micron's shares, Goldman Sachs analysts see this as an opportunity to increase investments in the company. Micron's capital expenditures are on the higher end, approximately 35% of revenue, suggesting a low teens billion-dollar level in aggregate capex. The company also announced a raised capital expenditure forecast for fiscal year 2024 to $8 billion, which includes greenfield fabs in Idaho and New York, and anticipates receiving $6.1 billion in grants from the U.S. CHIPS Act.
InvestingPro Insights
Following UBS's updated outlook on Micron Technology (NASDAQ:MU), InvestingPro data provides additional context to the company's financial health and market performance. With a current market capitalization of $157.64 billion, Micron has been navigating a challenging fiscal environment, evidenced by a revenue decline of -20.6% over the last twelve months as of Q2 2024. Despite this, analysts are optimistic about the future, predicting sales growth in the current year and forecasting profitability for the company this year.
InvestingPro Tips highlight that Micron has a history of raising its dividend, with three consecutive years of increases, and analysts have revised their earnings upwards for the upcoming period. These factors may reassure investors about the company's commitment to shareholder returns and confidence in future performance. Additionally, Micron's liquid assets surpass its short-term obligations, indicating a healthy liquidity position. With a strong return of 114.4% over the past year, the company has demonstrated its resilience and potential for growth amidst market fluctuations.
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