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Should You Buy Micron Stock? 3 Pros, 3 Cons

Micron faces little risk from a U.S.-China trade war, but other risks loom

Micron stock - Should You Buy Micron Stock? 3 Pros, 3 Cons

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Micron Technology, Inc.(NASDAQ:MU) beat earnings expectations last month and closed at $61.07 on March 21, just off 52-week high of $63.42.

Since then, Micron stock has retreated, and the stock now sits at $48.46 per share. Micron stock has more than doubled since December 2016.

MU is one of the world’s top producers of memory chips. Micron accounted for 21% of global DRAM sales in the third quarter of 2017, putting it behind Samsung and SK Hynix. The three held a combined market share of over 95%.Micron also has a strong position in flash memory, commanding 11.5% of that market in the fourth quarter.

Micron was recently downgraded by UBS analyst Timothy Arcuri, who cited cyclical concerns with the stock. However, most of Wall Street remains bullish on Micron stock.

Micron stock has done well since I last wrote about it. But is Micron stock still a buy?

Micron Stock Pros

Limited Trade War Risk: Last week, Eurasia Group president Ian Bremmer tweeted the names of U.S. companies which depend on China.

Given the talk of a trade war between the United States and China, this looks concerning.

However, I don’t see China as a big threat to Micron-at least right now.

China is working to develop a domestic semiconductor industry, but right now it still depends heavily on imported memory chips.

And as I mentioned earlier, around 95% of global DRAM chip sales come from Micron and two other companies, both of which are South Korean.

Could China threaten to buy more from Micron’s South Korean competitors? Maybe. However, China is also angry with South Korea.

Micron could also benefit if China decides to tone down tensions with the United States. Last month, Trump asked China to buy more chips from American manufacturers such as Micron, and the Chinese government offered to do so.

High DRAM Prices: MU has enjoyed a very favorable market environment over the past few years. Memory chip prices rose 26 to 31 percent in 2016.

According to DRAMeXchange, which tracks the prices of memory chips, DRAM prices rose 76% in 2017.

The result is high profit margins for memory chip producers. According to Finviz, Micron’s net margin stands at 38.7%.

Stock Has Fallen: Concerns with Micron stock may already be priced in, since the stock has lost ground over the past month and remains 24% off its 52-week highs.

Micron Stock Cons

Capacity Buildup: Chip prices may be high right now, but eventually supply will catch up with demand.

Last year, memory chip producers ramped up capital spending. Samsung doubled its capex from $11.3 billion to $26 billion. IC Insights president Bill McClean commented:

“In my 37 years of tracking the semiconductor industry, I have never seen such an aggressive ramp of semiconductor capital expenditures.  The sheer magnitude of Samsung’s spending this year is unprecedented in the history of the semiconductor industry!”

According to SEMI, global spending on semiconductor equipment rose 37% to $56.6 billion in 2017.  

This means more capacity and lower prices are on the horizon.

Cyclical Stock: As I mentioned in 2016, Micron is a cyclical stock. It depends on memory chip prices, which can fluctuate wildly. Buying a cyclical stock like Micron at the wrong time can hurt your portfolio.

Look at how Micron stock fared in 2015, when DRAM prices fell:

Micron’s stock price slid, falling from the mid-30s in December 2014 to less than $10 a share in the spring of 2016.

According to McKinsey on Semiconductors, chipmakers like Micron tend to run their plants at full capacity, even when prices fall, since their fixed costs are very high. The machinery will age even if it isn’t being used as much.

This excess production causes prices to plummet.

Not so Cheap: Micron stock looks cheap at first glance, trading at less than 6 times earnings and 5 times forward earnings.

However, on other measures such as price/book and price/sales, Micron stock doesn’t look as cheap.

Price/sales and price/book are better measures of value for cyclical companies like Micron, whose earnings fluctuate with the business cycle and often lose money during downturns. On an annual basis, Micron lost money from 2007 to 2009.

Bottom Line for Micron Stock

I would be cautious in buying Micron stock. If I bought it, I would try to hedge against a downturn.

The global memory chip boom could continue for a few more quarters, but it looks like it might be slowly running out of steam. The Bank of Korea recently issued a report stating that it thinks DRAM demand could weaken in the second half of 2019.

China poses a big challenge to chipmakers like Micron, and they will need to innovate in order to stay ahead.

China is making some pprogress In February, Apple Inc. (NASDAQ:AAPL) agreed to buy flash memory chips from a Chinese chipmaker called Yangtze River Storage Technologies for phones sold in China.

As of writing, Lucas Hahn did not have a position in any of the aforementioned securities. 

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