Congratulations to anyone who had the guts and/or foresight to step into Micron Technology, Inc. (NASDAQ:MU) a year ago.
In January of 2016, Micron stock reached a multi-year low of $9.31, and since then has advanced more than 130% to a price near $22 on the very plausible prospects of a turnaround.
[ad#Google Adsense 336×280-IA]Granted, MU stock has gotten more than a little ahead of itself en route, jumping 13% following its Dec. 21 fiscal Q1 earnings report; the memory maker swung to a bigger-than-expected profit.
That day’s bullish gap has since partially been filled, though the profit-takers are likely to keep working to close the remainder of the gap.
Nevertheless, for an investor patient enough to wait for Micron stock to find something that looks like a trade-worthy bottom, the improving memory market may be even more bullish than the company’s getting credit for.
MU Stock: The “Bust” of the Boom/Bust Cycle is Over
It’s a pattern trading veterans have seen countless times. The market for a product heats up thanks to a technological or cultural breakthrough, too many companies jump into that business to capitalize on strong prices, a supply glut is created and then those very same companies scale back or altogether quell their production because once-hot market prices have plunged to levels that simply aren’t profitable.
We saw it when solar panels peaked in 2011, when crude oil peaked in 2008, when tech stocks peaked in 2000, when housing peaked in 2007, etc.
The boom-to-bust cycle that sent MU stock into a 70% nosedive over the course of 2015? A massive flood of NAND and DRAM memory in 2014 that turned a seller’s market into a buyer’s market.
The numbers tell the tale.
NAND memory — you know it better is flash memory or solid state memory — has been around for years, but was prohibitively expensive except for use in small formats like jump drives. In 2010, a mere 8 GB of NAND memory cost as much as $15.
As is always the case though, opportunities for fiscal gain at the same time technology allows for ever-cheaper production sent prices sharply lower. By early 2016, that 8 gigabytes of NAND memory was only selling for $1.40. That’s not enough for Micron to turn a profit.
Ditto for DRAM (or Dynamic Random Access Memory). As recently as late-2014 a unit of 4 GB DDR3 was selling for $32.75, and as of the middle of 2016, it was selling for only $12.50. The price-killing glut was prodded by too many manufacturers, and not enough demand. It’s also the reason profits per share of Micron stock turned sharply negative four quarters ago.
MU shareholders have good reason to be optimistic about the near future, however.
DRAM, NAND Prices on the Rise
The NAND and DRAM supply glut seems to have run its course. Since late June, the cost for 16 GB of DDR4 DRAM has advanced from $80 to $103. NAND prices are following suit.
And it’s not as if the recovery effort is likely to stall this year. Computer memory market research outfit DRAMeXchange believes NAND prices could rise another 10% in 2017, as makers ramp-up their production capacity, which they quelled just a few months ago; demand has finally caught up with price and availability.
It still may not be enough or fast enough, however. Frank Huang, CEO of Taiwan-based Powerchip Technology, says demand for DRAM chips is going to exceed supply this year. The shifting dynamic bodes well for MU, and by extension, for Micron stock.
That marketwide rebound in computer memory prices augments the potential of MU’s most recent acquisition.
Completed in early December, the deal to acquire the two-thirds of memory company Inotera Memories it didn’t already own gives the suitor not only some new DRAM-making technologies, but beefs up its production capacity at a time when the world needs much more DRAM. UBS analysts believe the Inotera deal will improve gross margins by two to three percentage points, and increase earnings per share of MU stock between 6% and 8%.
While the underpinnings for revenue and earnings growth are compelling, that doesn’t change the fact that MU stock is still overextended despite the 7% pullback it dished out last week.
Don’t confuse any further near-term weakness as an indication of ongoing long-term problems, though. The tide has turned. Micron stock is a buy on any decent dip and subsequent technical bottom. The storm is now in the rear-view mirror.
— James Brumley
Source: Investor Place