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Will Legal Battles Finally End the Micron Technology, Inc. Stock Rally?

Though legal headwinds look ugly for MU stock, it’s too early to write the company’s obituary

By Josh Enomoto, InvestorPlace Contributor

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Micron Stock Is Poised for a Comeback

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For the past year, one of my favorite companies to discuss was Micron Technology, Inc. (NASDAQ:MU). Here was an organization that I admittedly felt was on the verge of collapse back in 2015. However, the semiconductor market picked up dramatically and so too did the fortunes of MU stock.

But like anything in the markets, what goes up must come down.

For a strong, dominant organization, a correction is a relatively brief blip before its stock surges to its next price target. Ordinarily, I would say the same thing about Micron stock. Management had previously weathered the ultimate storm, and the present consolidation phase is just a speed bump ahead of the freeway.

Unfortunately, some indicators suggest that time (and exceptional bullishness) is catching up to MU stock.

A nasty legal battle with United Microelectronics Corp (ADR) (NYSE:UMC) presents the greatest threat to MU stock. UMC accuses Micron’s subsidiaries of patent infringement. This latest move is a response to Micron’s accusations against the Taiwanese semiconductor firm.

On Dec. 4 of last year, MU filed a civil suit against UMC, citing the Defend Trade Secrets Act and Racketeer Influenced and Corrupt Organization Act. The suit also included China’s Fujian Jinhua Integrated Circuit Co. Micron alleges that these two companies stole trade secrets and engaged in various misconduct.

On top of that, our own James Brumley warned against the semiconductor industry’s severe boom-bust cycle. This dynamic negatively impacted key players in the past, including Samsung Electronics Co Ltd (OTCMKTS:SSNLF) and SK Hynix. In his words:

“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.”

Should investors take the hint and pull profits out of Micron stock?

Ugly Legal Battle Impacting MU Stock

Despite my earlier bullishness, I’m not inclined to disagree. For instance, I wrote an article on Apr. 17 last year discussing how Micron stock “still has plenty of time to grow.” If you bought MU at that time, you’d be up 58%, even with the recent lull.

Let’s be real. 58% is nothing to scoff at, especially if you achieved this during a nine-month period. Unless you had a crystal ball, you’d be crazy not to take some profits off the table. After all, Micron stock isn’t a dividend play like AT&T Inc. (NYSE:T).

I also concede that this latest legal drama is a bad distraction for MU stock. It’s not just the fact that Micron’s competitive advantage is compromised if the trade secret allegations are true. As Seeking Alpha’s Robert Castellano explains, 60% of Micron’s international sales went to China, or $10.4 billion. Another $2.54 billion went to Taiwan.

Obviously, having legal battles in countries you depend on for major revenues is never ideal. But it’s particularly disadvantageous when you’re dealing with the Chinese legal system. If human rights don’t take precedence in China, I doubt corporate rights do. Add in the toxic geopolitical climate in the Asia-Pacific theater, and you have the recipe for disaster.

Worryingly, Castellano notes that the Chinese court where UMC filed its counterclaim against Micron subsidiaries has a history of issuing severe injunctions against patent offenders. If Micron is found guilty — this is where geopolitics could come into play — MU stock is in big trouble.

Now Is Not the Time to Panic

Still, I think it’s premature to go into full panic mode. For one thing, forecasting price movements based on legal battles is fraught with risk. We’ve seen multiple accusations thrown in the technology space. However, the correlation between these legal issues and the impact on a company’s share price is questionable.

As far as the specific impact on Micron stock, don’t assume automatically that the Chinese court will favor UMC. Sure, the Trump administration’s foreign policy is indelicate, to put it diplomatically. But the President has shown he’s an extremely tough straight shooter. In other words, if China plays politics, America will respond, consequences be darned.

The Chinese government hates to be called out, and even more, hates to lose face. In this case, I think the Chinese court is incentivized to go by the rulebook, if not favor Micron.

Also, we should take comfort in the fact that MU stock is in a sideways consolidation. If the markets had an overwhelming sense that the legal battles won’t go Micron’s way, shares would slide rapidly.

Let me add a caveat to my statements by saying, don’t be stupid! I wouldn’t gamble everything I’ve got on Micron stock at this juncture. Certainly, we have nearer-term pressures that are concerning. Investors should be prepared for a dip or two. But on the other hand, now is a bad time to panic.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/will-legal-battles-finally-end-the-micron-stock-rally/.

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