Has Micron Technology, Inc. (NASDAQ:MU) lost its charm? On the surface, it’s a strange question to ask a company that has gained 46% year-to-date in the markets. Clearly, several investors love Micron.
Recently, however, unfavorable winds have struck MU stock.
Shares have been plateauing for the better part of the month as we head into Micron’s fiscal third-quarter earnings report, due out after Thursday’s bell. So the question is whether the markets are signalling that now’s the time to exit.
The cautious case is bolstered by the fact that 2016 was a stellar year. MU stock returned 53% for its shareholders after suffering an awful hemorrhaging in 2015. But it’s exceptionally difficult to string together consecutive standout performances, and Micron would know this firsthand.
The last time MU registered back-to-back double-digit returns was in 2013 and 2014. The next most recent incident was in 1998 and 1999, during the tech bubble madness. That means more than a decade has passed since Micron stock reliably profited investors with outsized gains.
The recent momentum is impressive, but it’s hard to ignore the company’s historical volatility.
How Long Will Semiconductors’ Run Continue?
It’s quite possible that Micron stock is simply experiencing a case of “too fast, too soon.” Nothing lasts forever in a cyclical market like memory chips. Investors are particularly emboldened because it’s temperamental MU that we’re discussing.
At the same time, we should be aware of fundamental risks that may challenge MU stock. In my opinion, competitive and industry headwinds represent the toughest obstacles. With specialty chipmakers all racing to the bottom in terms of manufacturing costs, Micron also must face fierce contenders like Samsung Electronic (OTCMKTS:SSNLF) and Toshiba Corp NPV (OTCMKTS:TOSBF).
This segues into the broader industry itself.
While semiconductors over the trailing year have enjoyed a demand surge, that is not guaranteed to last. If Micron is caught on the wrong side of an industry downdraft, that could spell trouble for MU stock. Although the company has redeemed itself nicely, its financials aren’t the greatest thing in the world — about $4 billion in cash against $12 billion in debt.
That being said, management mitigated the risk toward Micron stock by cutting what doesn’t work, and going with what does.
For instance, the company has done a great job of controlling their days inventory, as well as their administrative expenses. Simultaneously, MU ramped up its research and development expenditures, which is critical in maintaining its competitive edge.
We also have to remember that while semiconductors are historically volatile, we’re entering into a digitalization era. According to Market Realist, the “memory market is seeing strong growth as more devices use memory chips.”
If industry forecasts are correct, we could see 40% year-over-year growth in 2017.
Bottom Line on MU Stock
Despite positive signals from the industry, I personally believe we’re going to see wild trading in the chipmaker sector. During my time at Sony Corp (ADR) (NYSE:SNE), Sony executives complained bitterly about the race to the bottom in flat-screen TV manufacturing. It just doesn’t end well for companies that can’t handle the heat.
With so many players, the broader technology sector will eventually have to consolidate, similar to the airliners. It will be a dog-eat-dog world. If I had to engage this sector, I want the bigger dog, and this is what MU stock gives me.
Again, I understand that the company isn’t blessed with the absolute greatest fundamentals. However, Micron stock has above-average profitability relative to the competition. Its trailing three-year revenue growth is 11.7% compared to the industry median of 2.6%. It also has an enterprise value of $42.4 billion.
Ultimately, MU stock is about investing in a solid company stuck in a transitioning industry. Technology, of course, is the future, but that doesn’t necessarily mean larger manufacturing plants and payrolls. At the present rate of decline, plenty of semiconductors won’t make it.
However, Micron has proven that it is smart enough and big enough to weather the challenges ahead.
As of this writing, Josh Enomoto is long SNE.