After rallying more than 250% between May 2016 and this past June, it wasn’t difficult to deem Micron Technology, Inc. (NASDAQ:MU) a stock that was overdue for a pullback. Until that May-June rally, MU stock had lost more than 70% in the preceding 15 months.
So, investors found themselves looking at Micron stock as ripe for profit-taking and the shares lost almost 10% loss in July, fueling doubts the stock could move any higher.
Now, some are beginning to question those doubts, with bullish arguments holding more water than one might expect.
Laying Out the Bullish Case
The short version of a long story: Micron, along with a few other companies, makes memory chips for computers. It’s got a presence in the the big three memory markets — the NAND, DRAM and DIMM arenas — and though not the biggest in the business, MU is one of the most recognizable and more respected players in the industry.
That industry has not historically been well disciplined, though. Indeed, the 74% pullback MU stock dished out between late 2014 and May of last year was almost entirely the result of a memory glut. Micron, along with its peers/rivals, built up far too much production capacity based on strong memory prices in 2014, and each of them paid dearly for the poor decision.
That glut has since been reduced, though hardly forgotten. Which is what has more than a few investors wondering if Micron stock has done all it’s going to be able to do in terms of bullishness… especially knowing the key players in the memory chip business haven’t demonstrated restraint in the recent past.
They may be famous last words, but for Micron, this time is different.
Granted, you might have to look closely for the evidence, but it’s there: MU stock is considered a buy by those who have their finger on the pulse of the company, and its business.
Giving credit where it’s due, Motley Fool’s Anders Bylund summed up the crux of the memory glut matter quite nicely, recently noting:
“[as of mid-2016] sector giant Samsung Electronics was flooding the market with torrential volumes of low-cost chips, pedal to the metal in every memory factory. Both DRAM and NAND chip prices crashed hard in 2016, and Micron investors felt the pain.
Falling chip prices are a fact of life in this market — over the long run. Consumer demand for memory-equipped gadgets always seems to be on the rise, and manufacturers can keep the price tags low by tweaking and developing their production processes. But this is something else.
This is Samsung making a conscious decision to change the supply-and-demand calculation overnight. Other parts of Samsung’s diverse operations would surely make up for whatever money was lost to low-cost memory sales, so let’s turn up the production lines to “11” for a while, shall we?”
He’s right. More than that, it’s a cycle that has tended to play out time and time again. Eventually though, companies do figure out they’re making the same mistake over and over again.
InvestorPlace’s Brian Wu is one of those “in the know” folks that pushes the analysis to the next level, recently explaining:
“Although DRAM demand by the smartphone market has been tepid, technology migration by most manufacturers has been slower-than-expected leading to tightening supplies. Most manufacturers are unlikely to take on additional production capacity in the near-term, meaning the situation might last for another year or even longer.
But that’s just part of what the average Micron investor has had to grapple with. Many reckon that China’s ongoing interest in the space will disrupt the global memory market before long. Overheated Chinese investments in solar panels, displays, LEDs and steel led to a serious supply overhang and depressed prices everywhere.
But the truth of the matter is that most memory chipmakers are naturally wary of licensing technologies to Chinese manufacturers.”
That wariness is a relatively new thing, though a reality all the same.
Wall of Worry
With that as the backdrop, it’s arguably Morgan Stanley analyst Joseph Moore that has a grip on what the impact of the ether of worry might make on MU stock. He recently noted:
“Memory shortages have abated somewhat based on our conversations with computing customers, but the market is still healthy with most cloud participants indicating an expectation that supply will remain tight through next year, and continued increases in mobile DRAM in 4q.
… Cynics remain cynics and bulls remain bulls. What has changed is that the stocks started to falter, which led to some profit taking from bulls, and a sense from cynics that the stock sell off has emboldened shorts. We see the logic of both camps, but are inclined to a tactically bullish view near term given our fundamental outlook.”
In other words, MU stock is apt to keep climbing a wall of worry.
Numbers Don’t Lie
To that end, in support of Moore’s and Wu’s assessment is the final arbiter — price. While the price of memory chips is supposed to be falling, it’s not. Sixteen gigabytes of DDR4 DRAM is still right around $135, where it’s been since March, and still well up from year-ago prices of $90.
Meanwhile, though traditional DIMM prices are near multi-year lows of $60 per 16 gigabytes, they’re stabilizing at that level now that DIMM is effectively a commodity. They’re still a cash cow (maybe not a fully grown bovine, but a “cash calf”) for Micron.
NAND drives, which you know better as solid state hard drives, have seen modest but measurable price increases since hitting bottom in the spring of last year.
In other words, if there’s a memory glut, it’s sure not evident where it would normally be the most evident.
Bottom Line for MU Stock
Bulletproof and infallible? No, it wouldn’t be accurate to characterize MU stock that way. On Wall Street, anything can and eventually will happen. In this particular case though, the evidence — at least until further notice — appears to be stacked in favor of the company and the stock.
At a trailing P/E of 13.4 and fiscal growth in the cards, there’s more than enough room and reason for Micron stock to rekindle the rally that got rolling more than a year ago.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. Follow him on Twitter at @jbrumley .
