Micron Technology, Inc. (NASDAQ:MU) has had a tough couple of weeks. The MU stock price almost touched $50 for the first time in 17 years, reaching $49.89 on November 22. Seven trading sessions later, MU stock closed below $40. All told, MU dropped 20% — even though Micron Technology news was minimal, at best.
Rather, the MU stock price simply got caught in a downdraft in the semiconductor space. Nvidia Corporation (NASDAQ:NVDA) fell 14% over the same period. Advanced Micro Devices, Inc. (NASDAQ:AMD) dropped 12%. Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) declined 7%.
The semiconductor space has been one of the strongest in a bullish year for the broad markets. The iShares S&P NA Tec. Semi. Idx. Fd. (ETF) (NASDAQ:SOXX), an ETF based on the Philadelphia Semiconductor Index (commonly referred to as “SOX”) is still up 38% year-to-date, and had risen about 47% when the sector-wide decline began. Most likely, some investors looked to book profits — or thought the space had run too far, too fast.
Overall, neither argument necessarily is illogical. Chip stocks are notoriously cyclical — and notoriously volatile, as the MU stock price historically has shown. Between early 2013 and late 2014, for instance, Micron stock went from under $5 to over $35. It was back under $10 early last year before the recent, almost-uninterrupted, bull run.
But the recent pullback from here looks like a buying opportunity in Micron stock. I liked the stock last month around $45 — and there’s simply been no reason to change that outlook. The MU stock price isn’t as cheap as a sub-6x forward price-earnings multiple makes it look — but it’s still cheap enough. And I expect that once the near-term jitters are sorted out, Micron stock will resume its ascent.
Factors In MU Stock Price
Again, some sort of sell-off in the chip space makes some sense. NVDA has looked close to bulletproof for the past few years — but also saw its stock price rise by more than 700% in less than two years. AMD went from $2 to $15 before pulling back. Many other stocks in the space have seen big moves as well.
In the midst of optimism toward autonomous driving, artificial intelligence, and “cloud” adoption, among many other factors, investors may have forgotten that semiconductor stocks historically are valued relatively cheaply. The cyclical nature of the space, low growth expectations for PCs and eventually smartphones, and pricing pressure all suggest a bit more caution than investors have given the sector of late.
But Micron stock shouldn’t necessarily be grouped in with those other stocks. Even though the MU stock price has soared, its multiples haven’t. Rather, earnings growth has shattered expectations. And at the end of the day, Micron stock comes down to DRAM pricing and NAND pricing. Both factors, too, have been stronger than expected.
Selling Micron in a basket of chip stocks seems like a classic case of throwing the baby out with the bathwater. The fact is that memory pricing is remaining stable, per recent industry data. Though Micron recently expanded a fab co-owned with Intel Corporation (NASDAQ:INTC), overall capacity growth for both NAND and DRAM still appears manageable.
The case for MU stock at current levels is that this time is different. Samsung interrupted the last boom by ramping up capacity — which led prices to plunge, and caused Micron earnings to plunge into negative territory. So far, that type of move just isn’t happening yet. And so there just doesn’t seem to be any Micron Technology news, or industry news, to justify a ~20% sell-off. At least, not yet.
Caution on the MU Stock Price
That doesn’t mean that pricing will maintain current levels forever. Samsung is reportedly expanding its DRAM production next year. The NAND supply shortage should be easing at the moment. Overall, pricing seems likely to drop next year — and indeed, analysts at the moment project a 14% decline in Micron’s earnings per share for fiscal 2019.
But those same analysts have been out in force defending the MU stock price. Morgan Stanley (NYSE:MS), Stifel, and Susquehanna all have upgraded Micron stock in recent weeks. And the fact is that FY19 EPS can decline — and Micron stock can remain cheap. It’s still trading at just 6.3x that FY19 figure. PC sales are better than expected. Cloud growth, a boon for memory manufacturers, isn’t going to come to an end in 2019, or any time soon.
An investor can’t just take $6+ in EPS, slap on a “cheap” 15x multiple, and assign MU stock a target price of $100. The cyclical nature of the business, and the importance of pricing to margins and profits, needs to be understood to fully understand the valuation of Micron stock.
But MU stock isn’t at $100. It’s at $42. Even accounting for cyclicality, that looks too cheap. Smoothing out the cycles, Micron’s earnings power probably is in the $4-5 range and that same “cheap” mid-teen multiple suggests fair value of $60, if not higher.
And from a short-term standpoint, it’s worth reiterating that Micron Technology news hasn’t changed since the stock stalled out just shy of $50. This is the same stock it was a month ago — perhaps with slightly better analyst opinion. The only difference is that it’s 15%+ cheaper. That’s too big a move — and it’s a move I expect MU stock to retrace on its way to $50 and beyond.
As of this writing, Vince Martin has no positions in any securities mentioned.
