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Micron (NASDAQ:MU) shares outgained the broader technology sector today after Goldman Sachs (NYSE:GS)upgraded the company citing a forecasted reduction in global memory inventories due to higher demand.
Micron and others to benefit from decreased inventory
Micron is the world's third-largest memory manufacturer in both NAND and DRAM chips with the largest being South Korea's dominant pair consisting of Samsung and SK Hynix.
For the past year, memory inventories have been higher than usual due to slackening global demand and almost zero interruptions to production from any of the major players. As a result, profitability has sagged, as evidenced by Micron's latest earnings report as anywhere from 10 to 30% of memory chip sales are in the direct, or spot-sale market. Long term contracts have some pricing guarantees but for spot sales, memory chips behave much like most commodities.
Lower prices simply mean Samsung and Micron can't charge as much. However, today Goldman Sachs upgraded Micron to a "buy" with a price target of $56 (currently it's trading around $45). The bank believes that there is sufficient evidence that global demand is growing stronger and naturally, prices will begin to rise as demand catches up to the available supply.
Goldman's Delaney backed up his upgrade of Micron with the following in a note to clients, "We now believe that inventory at the memory companies... is being depleted faster than we previously expected. In addition, we continue to expect the underlying rate of production to fall below longer-term demand growth in 2020."
One would hope that Delaney is aware, despite the fact he doesn't call out it out, of the situation in South Korea right now. SK Hynix and Samsung together make half of the world's memory chips, and they are getting threatened right now with the loss (or limited availability) of some of the crucial ingredients that go into memory manufacturing. In my article, I even postulated, a few business days before GS's upgrade that Micron would stand to benefit from tightening memory supplies and now today it's made official that Wall Street believes Micron has room to run given the global setting.