Should You Buy Or Sell Micron Technology, Inc. (MU) Stock? 3 Pros, 3 Cons

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In a two-year span, Micron Technology, Inc. (NASDAQ:MU) had an electrifying run. MU stock soared from the single digits a few years ago to $35 in 2015. However, Micron’s sector slowed down, and Micron stock plunged back to $10 in early 2016.

Should You Buy Or Sell Micron Technology, Inc. (MU) Stock? 3 Pros, 3 Cons

Now, Micron stock is back on the incline. Shares have doubled over the past 12 months.

Fueling the run, Micron just posted a blowout quarter. The company swung back to profitability and saw huge revenue growth. Margins are heading higher, and the move appears sustainable throughout 2017. Will that be enough to keep powering the stock higher, or will the company’s considerable weaknesses show themselves again?

MU Stock Cons

Bad Balance Sheet: In 2011, Micron sported $1.9 billion in long-term debt. That figure has soared to $8.1 billion, and it continues to rise with almost every quarter. Long-term debt now greatly exceeds cash.

To the extent that the company does have current assets, we find them increasingly in accounts receivables and inventories. This suggests that the company’s cash position is weakening. While the upturn in business prospects of late will keep Micron out of trouble for 2017, watch its short-term fiscal position closely. The company could run into significant liquidity problems should it fall back into unprofitability and creditors get nervous.

Highly Cyclical Industry: Micron appears to have little to no sustainable moat around its business. The company has minimal pricing control. Listen to management, and they tell you they can’t forecast margins for a quarter. All they can do is keep costs down and hope pricing comes in well. That’s standard for a commodity business, it’s not fault of Micron specifically, but it makes for a lousy trait on a longer-term holding.

Between the end of 2014 and early 2016, MU stock fell 75%. This is the sort of things that happen to commodity businesses using a lot of leverage. MU stock is a fine one for trading, but beware of it as a longer-term holding.

Concentrated Business: Micron lives and dies on the memory industry. It has few other irons in the fire. That’s fine for a niche company, but at Micron’s $25 billion market cap, it’s a bit surprising.

Micron’s end markets are heavily effected by consumer demand, thus downturns in consumer optimism globally could leave the firm in a difficult position. Combine leverage, a commodity business and a limited sphere of products, and you have a highly vulnerable business during a recession.

MU Stock Pros

Cycle Turning Up: It’s true that MU stock is vulnerable to cyclical shocks. However, that’s not all bad news. When the cycle is going upward, there can be quick profits to be had. The all-important DRAM cycle has turned upward. PC DRAM pricing in particular is moving favorably, and this has taken MU stock with it.

Gross margins surged in the most recent quarter. They spiked up to 25% from 18%. This is still far below peak levels. Gross margins hit 41% in one quarter during the 2014 boom. And they spent a full year above 34%. So the recent 25% figure, while a great improvement from 18% previously, still leaves plenty of room for upside.

Since the company earned around $2.50 per share in both 2014 and 2015, a return to margin levels above 30% would likely send earnings back above $2 for 2017, offering room for MU stock to move to $30 at a 15 price-to-earnings ratio.

Great Quarterly Results: After a series of disappointing earnings reports, Micron delivered. Earnings for this most recent quarter soared to 32 cents per share from a loss in the previous one. And revenues surged 23% versus the previous quarter as well. DRAM prices rose 5%, while sales volume rocketed 18% higher. Shortages in the NAND space allowed Micron to profit off that segment of its business as well.

Following the quarter, Micron got a slew of upgrades. Analysts from Needham, Wells Fargo, Brean, JP Morgan, Baird, Susquehanna, Mizuho  and Duetsche Bank all lifted their price targets on MU stock. And notably, all those analyst shops mentioned have price targets at or above $25 per share, representing significant upside from today’s MU stock price.

3D XPoint: Little is known about 3D XPoint. We do know that it is a joint collaboration between Intel Corporation (NNASDAQ:INTC) and Micron. On its website, Micron states that 3D XPoint technology “is an entirely new class of nonvolatile memory that can help turn immense amounts of data into valuable information in real time.” Micron refers to it as a blockbuster and suggests that it will change the memory market going forward.

It’s hard to confirm if these claims are correct, since there are few technical details available. Same for information on cost effectiveness of the product. Micron doesn’t expect meaningful revenue from the product until 2018. So for now it’s just soaking up R&D money, and MU stock would benefit if there were more clarity on what exactly this will be.

That said, it’s a mysterious but potentially powerful catalyst for the firm’s stock price if the claims are correct.

Verdict on Micron Stock

Micron stock has been on a tear. And that could well continue. Shares rocketed in 2014 the last time the cycle turned. And we appear to be in the midst of another such move. Next quarter should be better than this one, and margins should keep advancing.

But don’t lose track of the real risks here. Micron has an ugly balance sheet and a generally low-margin commodity business. Maybe 3D XPoint will carry the company into a new era of more sustainable prosperity. But if it doesn’t, there’s likely to be real downside in Micron stock as soon as the memory cycle peaks again.

At the time of this writing, Ian Bezek owned INTC stock. He had no position in MU stock. You can reach him on Twitter at @irbezek.

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Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2017/01/micron-technology-inc-mu-stock-pros-cons/.

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