When I wrote about Micron Technology, Inc. (NASDAQ:MU) stock almost a month ago, I outlined a compelling bull case seen in few other stocks. Since the publication of that article, the stock has risen almost 10%. The case for buying MU stock remains just as strong now.
However, the history of the stock is one of large moves in both directions. Since the 1990s, the stock has risen when memory prices remained high and sold off when those prices collapsed. Although MU stock remains a strong buy today, Micron investors should understand the history of the stock and buy and sell accordingly.
It’s not Too Late to Buy MU Stock
Given the large increase, investors will naturally assume that they missed the boat. The MU stock price now stands in the mid $40s per share, up from the $10 per share range eighteen months ago. Rarely does an S&P 500 stock rise that much in that short of a time span. However, given that the stock’s PE ratio stands at about 10 despite the increase, the MU bulls have room to run. Many stocks with comparable growth have PE ratios five-or-more times this high. No market analyst can guarantee another fourfold increase. While I’m not predicting an increase that size, it remains possible.
Moreover, the Micron Technology news on growth numbers is extraordinary. Revenue growth is approaching 70% for FY 2017. This brings the forward price-to-earnings-to-growth (PEG) ratio in the 0.60 range for MU stock. The average PEG ratio for the S&P 500 is 1.33, almost twice that figure. Rarely do prospective buyers see such a solid buy case on an equity. However, successfully investing in Micron for the long term means understanding the equity’s history.
MU stock reached its all-time high of $97 per share in July 2000, driven by the lofty valuations of the 1990s-technology boom. The stock has not traded that high since, and the current price remains over 50% below the record. However, given the current PE and PEG ratios, the MU stock price could finally take out that all-time high. The question remains, how long can the rally last and how far will it go?
Expect MU Stock to Follow Historical Patterns
Again, history can serve as a possible guide. In late 2012, MU stock traded at below $6 per share before enjoying a run to $36 per share by the end of 2014. However, memory prices subsequently collapsed in 2015, and the stock fell to below $10 per share by 2016. The cycle has been repeated a few times over the last quarter of a century. The stock moved to almost $48 per share back in 1995 before falling back below $9 per share by July 1996.
Through the history of MU stock, the stock price has been tied to the demand fortunes of memory chips. The chips may have switched from desktops to laptops to phones and tablets. However, the cycle remains the same. And given this cycle, holders of MU stock should predict another collapse in the stock price will come with a subsequent drop in memory prices.
This level of stock growth and collapse appears to be limited to Micron. Competitors such as Intel Corporation (NASDAQ:INTC), Applied Materials, Inc. (NASDAQ:AMAT), and Western Digital Corp (NASDAQ:WDC) show a long-term growth pattern amid the fluctuations. Advanced Micro Devices, Inc. (NASDAQ:AMD) moves up less frequently.
Chip Prices Will Remain High for Now
The good news for current investors is that demand will likely remain high for the foreseeable future. Additionally, 3D chips have had a slower production process, and neither MU nor its competitors have moved to increase production capacity. Analysts expect demand to catch up next year. However, no price reductions are expected until at least early 2019. And if history serves as a guide, market stabilization would likely be a good time to sell MU stock finally.
However, for now, investors still have time to buy into the bull run into MU stock. Succeeding with Micron means understanding the stock’s history. With the low PE ratios, low PEG ratios, and memory shortages continuing, investors should expect continued increases in the MU stock price. However, once the market stabilizes and history repeats, MU stock suddenly turns into a sell. Because Micron serves a strong bellwether for the chip market, MU stock could serve investors well, regardless of the stock’s direction.
As of this writing, Will Healy is long MU stock.
