Micron Technology, Inc. (MU) Stock Could Be More Trouble Than You Think

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It has been a good run for Micron Technology, Inc. (NASDAQ:MU) stock of late. Micron stock has risen 150% from lows around $10 in early 2016. MU stock shot up in December after fiscal first quarter results impressed investors. Analysts are positive on MU: the average target price of $32 represents another 27% upside for Micron stock.

Micron Technology, Inc. (MU) Stock Could Be More Trouble Than You Think

Everything seems to be going well for MU. Maybe too well. Pricing in NAND and DRAM is holding up well, allowing Micron’s margins to expand. Competitors such as Western Digital Corp (NASDAQ:WDC) appear to be cooperating on that front.

MU is trying to move into more value-added products in graphics and automotives, which could moderate the company’s traditional reliance on memory pricing. And with that pricing holding, FY17 (ending August) and FY18 earnings seem likely to be impressive.

The problem is that Micron’s business still is highly cyclical. Outgoing CEO Mark Durcan admitted in an interview with Barron’s in December that it would take years for MU to capitalize on its opportunity in advanced chips. Until then, Micron is reliant on its memory business. And history shows that business has a tendency to turn when investors least expect it.

Micron Stock Has Been Here Before

What’s interesting about a lot of recent commentary on MU, particularly from analysts, is the enthusiasm toward current memory pricing. Memory pricing is a good thing, to be sure, at least in the near-term. The company’s Q1 results, which beat estimates significantly and led Micron stock higher, show why. Gross margin increased 7 full points sequentially, leading to a $0.04 beat relative to consensus. And pre-announced Q2 results, which spiked MU stock again last week, showing further margin expansion.

The catch is that higher pricing tends not to hold. Increased margins lead to more competition, which brings pricing down, and the cycle turns against Micron. In fact, that’s pretty much what happened the last time Micron stock peaked in 2014. Gross margins then were in the mid-30s; they’d hit the low 20s within two years. Micron stock in turn dropped from $35 to $10.

Margins may not compress immediately, but it is a significant concern. Samsung Electronics (OTCMKTS:SSNLF) is already increasing 3-D NAND production. China has long been interested in the space, and under a Trump administration, has little chance of acquiring an American company. The higher pricing is in the near-term, the greater the risk of a competitor trying to undercut that pricing and/or taking share. And that’s a major risk for Micron stock.

Semiconductor Stocks Have Been Here Before

The broader issue with MU stock is that it looks a bit like other recent chip high-flyers who have stumbled. The most obvious recent parallel is Nvidia Corporation (NASDAQ:NVDA). NVDA was soaring until two analysts reversed field and downgraded the stock — based largely on cyclical concerns. Within a matter of days, a high-flying chip play had become a battleground stock.

NVDA isn’t the only example of that phenomenon … to varying degrees, Mobileye NV (NYSE:MBLY), Ambarella Inc (NASDAQ:AMBA) and Apple Inc. (NASDAQ:AAPL) supplier Cirrus Logic, Inc. (NASDAQ:CRUS) have seen valuations compress sharply in a short amount of time. Micron stock seems at similar risk of a change in sentiment, and a change in focus from near-term margins to longer-term competitive risks.

This is the nature of the semiconductor industry, though investors seem to forget that fact from time to time. It’s a brutally cyclical, brutally competitive business. When pricing holds, capex spend tends to increase — as it has in memory — and competitors increase supply to capture more share. It’s not an impossible business, to be sure. But it’s not an easy one, either.

And in cyclical businesses, and for cyclical stocks like MU, it’s precisely when the news is all good that investors need to pay attention the closest.

Micron stock may not be at risk of a near-term collapse, to be sure. Analyst sentiment can stay positive for some time, and investor sentiment may follow. But a 150% gain in barely a year implies a lot of the upside has been captured, and the commentary around Micron stock implies the mid-term risks may be understated. Everything looks good for Micron right now, and history shows that means danger is likely around the corner.

As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/micron-technology-inc-mu-stock-more-trouble/.

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