Calling a spade a spade, the bullish, value-based arguments in support of Micron Technology, Inc. (NASDAQ:MU) are more than valid. Priced at a trailing P/E of 6.7 and a forward-looking P/E of 5.0, MU stock about as cheap as any ticker has a right to be.
Unfortunately, the Micron story is one that’s quickly becoming less about value and more about perception. While MU stock already reflects the impending tapering of computer memory prices (and then some), the headlines brewing up for release in early and then late 2018 are apt to spook investors.
Once that starts to happen in earnest, the 300% rally MU stock has mustered since mid-2016 could come unraveled in a hurry.
In other words, it may be wiser to go ahead and lock in the gains you’ve got in-hand with MU stock than risk being on the wrong side of the rhetoric coming over the course of 2018.
Timing Is Everything for MU Stock
The short version of a long story: The computer memory industry has done a pretty poor job of managing the supply/demand dynamic in the past.
Key players like Micron, Corsair, Samsung Electronics (OTCMKTS:SSNLF) and SK Hynix have all been through several boom-to-bust cycles when RAM prices bottomed due to oversupply, an oversupply prompted by the high RAM (and NAND) prices stemming from too little supply.
That’s largely why MU stock is so cheap right now; the market just doesn’t trust that the company isn’t racing right back into an all-too-familiar problem.
And just for the sake of disclosure, yes, I’m the same guy who just in August said the lull in Micron stock was a buying opportunity. That was 30% and four months ago though and much has changed in the meantime. Chief among those changes is greater clarity about what the near-term future holds for computer memory prices.
In short, the foreseeable future doesn’t look nearly as strong as the past.
That’s not exactly what Micron’s CFO Ernie Maddock described earlier this week, when he commented of the expected 40% to 50% increase in memory production this year:
“This has the setup to be an incredibly healthy environment. At that level of bit supply, our belief is there is ample demand to absorb that level of bit supply. Remember, it is healthy for pricing to come down and follow the cost curve. That is way markets expand.”
Just bear in mind the industry-leading company’s chief financial officer has to put on an optimistic game-face. Other insiders and experts aren’t limited by the same unspoken rules.
Keybanc’s Weston Twigg is one of those “other insiders and experts,” and while he thinks the supply of DRAM will remain limited during the first half of the year — favoring Micron — things change a little further down the road. He wrote earlier this month:
“We expect DRAM pricing to flatten in the 2Q, and to be flat to down modestly in the 2H. DRAM producers are still typically anticipating around 20% bit demand growth this year, and appear to be planning supply in that range, with around half of the bit growth coming from node transitions, and half from new capacity.”
Twigg isn’t exactly optimistic about the NAND market either, adding to the same notes:
“We continue to expect NAND oversupply in 1H18 as producers ramp 64-layer 3D NAND into high volume. Based on our checks, we expect NAND contract pricing to decline slowly in the 1Q, perhaps 3-5% q/q, but more sharply in the 2Q, perhaps into double-digit territory.”
Twigg isn’t the only one to see the NAND headwind. TrendForce’s DRAMExchange, which monitors the memory industry’s ever-changing dynamics, sees it too.
With outfits like Toshiba Corp (OTCMKTS:TOSBF), Samsung and Intel Corporation (NASDAQ:INTC) all planning to ramp-up their output, these “expansion efforts by major suppliers may lead to a possible oversupply in 3D-NAND Flash market from 2019 onward.”
The DRAM market might hold up a little better, if major cloud players like Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) and Amazon.com, Inc. (NASDAQ:AMZN) continue to upgrade to next-generation and higher capacity RAM, as expected.
That’s a fairly big “if” though, especially knowing so many players are rushing in to beef up their production capacity. Manufacturers may be in a hurry, but end-users don’t have to be.
Bottom Line for MU Stock
With all of that being said, it’s important to note that while the memory market may be once again moving into a period of oversupply relative to actual demand, there’s still more restraint in place now than we’ve seen in the past. What may end up being called a glut still won’t be as damaging as past (actual) gluts have been.
That’s not the point though. The point here is that MU stock is vulnerable to investors feeling like there’s an oversupply problem, and the stage is already set for dire headlines.
Don’t give up on Micron Technology though. Once 2018’s supply/demand dust settles and it proves the world’s needs are at a tipping point thanks to the advent of cloud computing, the Internet of Things and more, investors may finally start to believe that the supply is rather well balanced with demand beyond 2018.
Perception is everything.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
