Without a doubt, Micron Technology, Inc. (NASDAQ:MU) was one of the revelations of the markets last year. Micron stock blasted naysayers with a blistering 53% return. That went a long way in eliminating the foul taste of 2015, when MU hemorrhaged 59% of equity value. Better yet, the momentum is still strong.
Year-to-date, Micron stock is looking at an 18% return. If it can maintain this rate, it will easily pull a repeat of 2016’s incredible run.
Of course, that’s a big if, but the fundamentals are supportive. As InvestorPlace writer and IPO playbook editor Tom Taulli notes, the “biggest driver for MU is the supply-and-demand situation.” The excess supply of computer chips that killed sales for semiconductors in recent years has eased considerably.
Also, the competitive environment for Micron stock is quite favorable. Only a handful of rivals directly impede MU stock, including Samsung Electronics (OTCMKTS:SSNLF) and SK Hynix Inc (OTCMKTS:HXSCL). Unlike old western movies, this town is more than big enough for all of them, at least for now.
The question now is, when the next big headwind comes storming in, will Micron stock be ready? More pointedly, will investors stay patient enough to find out?
Lingering Doubts Exist for Micron stock
As great as the MU stock rally was last year, it doesn’t completely erase the misery of 2015. A 59% loss in the markets requires a 144% profit to breakeven. The quick math works out like this: 100% ÷ (100% – 59%).
As mentioned before, Micron stock managed 53% in 2016, which is obviously well off the breakeven point. This math exercise also demonstrates the significance of money management, especially for volatile investments.
Click to Enlarge Furthermore, even with last year’s victory, MU stock is behind for the decade in terms of annual returns.
In the last seven years, Micron stock has three good years, but four bad years. Now the average haul is a very encouraging 32%. Still, investors have had to go on a ride to get their share of the glory. What bulls and bears can agree on is that MU stock is not a stock for the squeamish.
Finally, a split dynamic in the derivatives market has left semiconductor traders on tenuous ground. Short interest increased for Intel Corporation (NASDAQ:INTC), Applied Materials, Inc. (NASDAQ:AMAT) and especially Qualcomm, Inc (NASDAQ:QCOM). It decreased for Advanced Micro Devices, Inc. (NASDAQ:AMD), Broadcom Ltd (NASDAQ:AVGO), and Micron stock.
On paper, MU looks like a crapshoot. However, that doesn’t mean it will stay that way.
MU Stock Will Look More Convincing
First, I think potential buyers should take a small bit of encouragement from the options traders. Yes, big semiconductors are split evenly in terms of sentiment. However, they collectively chose Micron as belonging to the better half of the equation. Since option traders typically have their fingers on the trigger, it’s safe to assume that they absorb the latest news with aggressive vigor.
On the other hand, traders can be wrong, and sometimes, painfully so. That’s why I like to see if there are confirming fundamentals. In MU’s last earnings report, the company returned to profitability after three consecutive quarters of droughts. More importantly, Micron stock received an upgrade by Zacks Investment Research to a “strong buy.” This shift was due to a sizable lift in earnings-per-share expectations.
But the biggest draw for MU stock is its technical trend line. Since November of last year, shares have charted a distinct pattern of higher highs and higher lows. This pattern has also occurred above Micron stock’s 50- and 200-day moving averages. No sign of weakness exists, apart from the daily ebb and flow of market trading.
The real test for Micron will come when it releases its second-quarter results next week. But given the technical enthusiasm for MU, as well as the company’s own expectations, I think anything other than a long play is a risky one. It’s an old adage but it’s still very much relevant — you don’t want to fight the tape.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.