For Micron Technology, Inc. (NASDAQ:MU), it’s been a good year — well, mostly. The stock has been on fire, despite the MU stock price falling from $50 to $40 in just a few trading sessions. Although the 20% decline came in a hurry, shares of Micron are still up 90% on the year.
So what’s the Micron Technology news?
First, Micron increased its share count to pay down debt. This in itself creates more supply, which as economic principles would dictate, generally hurts pricing.
There have also been some concerns around the pricing power for flash storage. In a research note by Morgan Stanley’s Katy Huberty, she highlighted why shares of Western Digital Corp (NASDAQ:WDC) may be heading lower as a result. However, Huberty did not call out Micron for the same reason. Why the disparity?
I would argue it’s because Micron has a larger DRAM business — a business that is still doing incredibly well. As a result, Micron should continue to churn out strong earnings and revenue growth.
With or without the flash storage concern, I think shares of Micron would have come under pressure anyway because almost all of tech fell in the first few trading sessions of December.
This included Apple Inc. (NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT). Tech was under pressure to start the month thanks to this great rotation, and MU stock was no exception.
So What Does It Mean for Micron?
Last quarter, DRAM revenue represented 64% of total revenue. So even if there is softening in the NAND market, Micron is somewhat protected. However, last quarter, Micron reported that NAND pricing climbed 5% sequentially (to go along with 3% volume growth).
Further, earnings per share and revenue (midpoint) guidance of $2.16 and $6.3 billion for next quarter easily beat consensus expectations of $1.85 and $6.06 billion, respectively. In other words, management foresees strong pricing and demand going forward. So not to discredit Huberty’s observations, but I’m not sure that the 20% selloff was fair for MU stock.
To be fair, MU stock has since bounced back to over $42 from $40, but still, the dynamic may not have shifted as much as investors think.
Full-year 2018 estimates are calling for big growth again. Revenue expectations call for $23.3 billion, while earnings are forecast to grow almost 60%.
Also consider that these numbers may not be high enough, as crazy as that sounds. Micron has now beat on earnings and revenue estimates for five straight quarters. On Dec. 19, it will try to make it six straight.
So how much are we paying for this type of growth? Surprisingly little. MU stock trades at 9 times last year’s earnings and 6.2 times 2018 estimates. Why so low? Because Micron operates in a boom-and-bust environment.
We’ve seen the MU stock price go from $10 to $35 and back to $10, and then back to $30, $40 and most recently $50. It’s a volatile name, and as a result, investors have been willing to pay less.
Trading MU Stock
The longer Micron continues to turn in good results, the longer its stock price will continue to rally. A big part of that is its low valuation. For as reluctant as investors are to give MU stock a fair market value, they simply can’t sell the stock at this low of a valuation when earnings continue to come in strong.
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So where does that leave us? Ultimately we should be buyers, and the reasoning is simple. At $42, we’re 16% off the recent highs, while the fundamental picture still looks fine. For short-term, risk-averse traders, they should be buying right here. $42 has been a pretty obvious level since October, serving as both support and resistance.
Now below the 50-day moving average, if $42 fails and the MU stock price closes below this level, investors can bail. While that may cause some investors to exit prematurely, we don’t want to be around when Micron enters the “bust” phase of trading. From what management has said, business continues to do well.
Guidance will be a strong tell as to whether Micron is seeing any pricing or volume weakness. At the first sign of diminishing pricing power, investors could bail on MU stock. For some investors, perhaps that means a limited-risk options spread position is most appropriate. The good news about $42? We’ll know right away whether the trade will work.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
