One clue to a bear market is when good news isn’t good enough.
Micron Technology, Inc. (NASDAQ:MU) offered a lot of good news when it last reported earnings in March. It handily beat earnings estimates of $2.69 per share and $7.3 billion of revenue.
But it just missed the “whisper number” of $2.81 per share, coming in at $2.80. Since then Micron stock is down 18%.
By normal standards this should make Micron stock a stone-cold bargain. At its May 4 opening price of about $46.60, it’s selling for a price to earnings ratio of 8.18. That’s Ford Motor Company (NYSE:F) territory. That’s insanely low.
What’s setting the bar so low is our old friend fear. China is getting into the memory market. Within two years, it is believed, memory prices could be down by more than half.
Can Micron Keep Up?
China isn’t the only big player coming into Micron’s space.
Intel Corporation (NASDAQ:INTC) is putting $14.5 billion into capital spending this year, much of it aimed at beating Micron in the memory business. The two companies discontinued their flash memory partnership in January and recently agreed to part ways on 3D NAND chips.
Micron’s rise from sales of $12 billion in 2016 to $20 billion in 2017 was fueled by data centers and smartphones, but smartphone sales are now declining
The question now is how long the data center boom will hold up. Cloud companies have been putting more chip memory into their data centers and this has fueled Micron’s profits.
But you don’t buy yesterday or today on the stock market. You buy tomorrow. Even the news of growing demand hasn’t been enough to keep Micron hot in the face of rising supply.
Micron Stock’s Secret Weapon
Micron does have a secret weapon, CEO Sanjay Mehrotra.
As they say out in Idaho, this isn’t his first rodeo. Before taking over Micron last year, Mehrotra built SanDisk, eventually selling it to Western Digital Corp (NASDAQ:WD), which he left at the end of 2016. He has now been at Micron 9 months, long enough to understand his new situation.
Mehrotra is rapidly expanding Micron’s production in Singapore.
Mehrotra knows which markets have legs and is aiming production at solid state drives and graphics. He got out of removable storage last year and now expects only “balance” between supply and demand later this year, rather than the bear market indicated by the current stock price.
Micron Stock Investors Are Expecting Past Not Prologue
Analysts keep expecting the future to reproduce the past, where Micron came up short on cash as memory prices crashed suddenly.
But the cloud boom isn’t slowing down, and those clouds are now going through their first upgrade cycle to meet demands for artificial intelligence applications. This makes memory even more important, and by focusing on drives used in such centers Micron is in good position.
Even while expanding investment, Micron has also been building up a cash reserve. It had $8 billion in cash and short-term investments on its books at the end of its most recent quarter, double what it had last June. Long term debt has fallen to $7.8 billion and could now be paid out of cash on hand.
A price to earnings ratio of 10 would mean a 25% bump in Micron stock price. That could happen after its next earnings report, assuming it can handily beat current estimates of $2.81 per share of earnings on $7.43 billion of sales. That’s no better than its report of the last quarter.
Micron stock looks poised to go higher this summer.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in F.
