Merrill is downgrading both Micron and SIMO. PT to 50 from 77 on COVID fears for Micron. Reduce SIMO PT to 40. OEMs supposedly will hold less inventory than normal due to fears of a demand shortfall over the next few months. Korean firms have continued production despite the virus, ergo there will be at best a very slight shortage or even a balance between supply and demand. They are cutting Hynix and Samsung as well, although they say Samsung is slightly more defensive due to their in-house demand from their mobile division.
Excerpts:
Overall, we reduce 2020 EPS by 10-20% for most
memory stocks with single-digit lower ASPs (with volume cuts relatively smaller due to
normalized chip demand from 4Q but some negative impact for 3Q newly assumed with
newly growing 1H chip inventories)....
Overall, our downgrades for global memory and Korea tech stocks are not based on a
long-term view – only a reflection of weaker short- and medium-term momentum or
earnings misses (March sales, 2Q earnings, and even 2H seasonality post COVID-19).
Most tech stocks already hit/exceeded previous highs, but 2-3 month long earnings
misses should lead to share-price correction, as we have seen in the past 10-20 years –
high volatility including Samsung. Against this backdrop, we lower the target P/B from
2x range to low- to mid-1.0x – back to the historical average or mid-cycle level
temporarily ahead of confirming a full-fledged recovery.
Micron
Micron’s margin, shareholder return (buyback) and financials (net cash) look better than
Hynix. However, a potential earnings miss or guidance cut for May-end quarter results or
even 2H of FY20 should be a new discount factor to the consensus target price. DRAM
remains highly profitable at 20-30% but it appears lower than 2017-18 peak levels (40-
50%) with limited ASP hikes. NAND loss should also be a risk factor, leading to overall
corporate earnings and ROE remaining lower than the upturn level.
Our PO of $50 is derived from 1.4x fair P/B – slightly higher than the historical average
but lower than the upturn level of near 2x. A potential earnings miss should be a
discount factor to apply to upcycle valuations at 2x or higher. The DCF valuation with 11%
WACC also suggests only $50 fair value even with 20-30% long-term OP margin
assumptions.
Upside/downside risk to our PO is mostly dependent on COVID-19 impact, apart from
company-specific cost reduction or mix improvement.
Our Underperform rating is mostly based on a potential earnings miss or guidance cut at
upcoming Feb-end quarter results call (25 March). Limited DRAM spot-market price
should also inhibit a stock rally, in our view.
Silicon Motion
COVID-19 impact could be larger if OEM customers cannot manufacture well SSD (solid
state storage using memory chips), smartphone, etc. Potential order cuts for NAND
controller ICs even for 2H should be a risk to 2020 guidance, which was bullish as of
early Feb.
Our PO of $40 is derived from 2.4x fair P/B – lower than the historical average of 3x due
to a potential guidance cut or earnings miss coupled with COVID-19 outbreak. Our longterm
DCF with 11% WACC also presents nearly $40 fair value even with 18% OP margin
assumptions.
Upside/downside risk is mostly dependent on COVID-19 impact, apart from the NAND
industry upturn/downturn and company-specific moves (new buyback, cost/mix
improvement, etc.).
Our Underperform rating is simply based on a potential earnings miss vs guidance and
consensus with a larger impact of COVID-19 – lower sales volume with margin squeeze
for 2Q and even 2H.
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