Few major publicly traded companies have felt the pain of market volatility last year quite like Micron Technology, Inc. (MU).
After surging to multi-year records in December 2014, Micron stock spent virtually all of 2015 giving heart attacks to fund managers and regular investors alike.
MU had no satisfactory answers for the rapidly changing semiconductor industry. While earnings performances were mostly in line with expectations, Micron stock suffered badly from the implications behind sharply declining revenue. But with the worst seemingly over, can MU stock bounce back from the dead?
Micron Stock: The Revenant
Admittedly, it has been a rough period for semiconductors in general. While the benchmark exchange-traded fund Market Vector Semiconductor ETF (SMH) essentially broke even for 2015, its trading pattern was all over the map.
Fundamentally, the barrier to Micron stock and its competitors is the moribund personal computer market. With technology increasingly geared toward the cloud and the Internet of Things, there’s not much benefit nowadays in providing the best chips for PC usage.
The textbook answer to MU would be to adapt. In the cutthroat landscape of semiconductors, however, that’s much easier said than done. The logical course of action is to move from the slaughterhouse that is the PC platform to mobile devices. If stalwart Intel Corporation (INTC) — which is down more than 5% year-to-date — can’t keep the boat afloat, MU probably wouldn’t fare much better.
That move would make sense were it not for arguably even more severe competition in the mobile space. Samsung Electronic (SSNLF) isn’t going to roll the red carpet out for MU in the Dynamic Random-Access Memory market — a high-density memory chip that can store considerable data in a small, physical space. In fact, a good portion of the troubles for Micron stock was due to Samsung oversaturating the DRAM sector. Attacking mobile at this point would certainly lead to further aggressive cost-cutting measures, something not necessarily favorable to MU.
Indeed, the ongoing DRAM war will claim another victim this Wednesday when earnings results for Micron stock are released. Wall Street has a very dim view for the second quarter of fiscal year 2016, with an earnings per share consensus estimate of eight cents in the red.
In the year-ago quarter, MU stock hit 81 cents against a forecast of 73 cents. Adding to the misery is revenue, which is expected to decline by a stroke-inducing 27% year-over-year.
So where does Micron stock go from here?
The solution could very well be the 3D XPoint — a revolutionary technology by a joint effort from MU and INTC that would massively increase the scope and space-density of memory chips.
Should MU be the first to penetrate the market with 3D XPoint, it would have a massive leg up on the competition, which would be comparatively running on technology from “The Flintstones.” The positive implications for Micron stock are patently obvious.
Of course, nothing is ever that simple in the world of semiconductors. Chief rivals SanDisk Corporation (SNDK) and HP Inc (HPQ) claim to have developed a technology that is a viable alternative to the 3D XPoint. They could also potentially release their variant first. If so, what would have been a boon in the markets for MU stock could turn out to be a disaster.
That’s the bad news. The good news is that it hasn’t happened yet. Also, we don’t know as much about SNDK’s proposed technology — it could work as advertised or it could be a flop. This, however, is just stressing over details that we have no control over.
Instead, the bullish argument for MU stock is how the markets might react in light of Micron’s presently distressed valuation. It’s speculative, yes, but there are signs that investors may be willing to give another go at MU.
First and foremost, Micron stock is backed by fairly solid fundamentals. Its profitability margins are among the best in the semiconductor industry, beating out SNDK in terms of net and operating margins. Free cash flow has been relatively stable since the beginning of the Great Recession. The balance sheet is a little concerning with the rising debt levels; however, it’s not to the point where it’s completely out of hand.
Second, MU stock is incredibly undervalued when measured against either trailing or forward earnings. This seems overly cautious by the markets, especially when you consider that the company has a potential goldmine under its sleeve.
It’s not for nothing that the short interest in Micron stock has been significantly cut down against recent highs. Also of note is that institutional ownership of MU stock, while fairly high, has come off substantially from its peak. Theoretically, this would imply less volatility moving forward as there are fewer fund managers (who are graded on performance) holding MU.
Bottom Line on MU Stock
Ultimately, Micron stock will be viewed in sharply contrasting perspectives. The pessimists, on the one hand, admittedly have the most guttural argument — why take a chance on Micron when it has lost so much in the markets? Afterall, the semiconductor industry is extremely competitive.
On the other hand, the optimists will state that MU stock is ridiculously undervalued, and that trading conditions are more favorable from here on out.
It’s a difficult assessment, but we do know that past troubles don’t always spell future failure. Played appropriately, MU stock could become an unexpected surprise.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.