High memory prices continue to bring high levels of attention to Micron Technology, Inc. (NASDAQ:MU). As pricing remains strong, and China and other parties suspect price fixing, many wonder where MU stock will go next.
An earnings report later this month may bring more guidance on Micron and the memory chip market. Still, memory prices remain the determining factor on Micron. As long as memory demand and memory prices continue climbing, MU stock should continue rising.
Allegations of Price-Fixing Continue
The high prices for NAND and DRAM memory have created nervous feelings for investors, consumers, and governments alike. China has just launched a probe of MU as well as its peers in the chip space Samsung and SK Hynix Inc. The Chinese allege that these three companies, which collectively dominate the memory chip market, have conspired to fix prices.
MU stock traded higher in morning trading despite the news. The Chinese government has become the latest in a long list of entities complaining about such prices. Consumers of memory such as Cisco Systems, Inc. (NASDAQ:CSCO), HP Inc (NYSE:HPQ), and Apple Inc. (NASDAQ:AAPL) also see profit margins squeezed when memory prices rise.
As one of the larger markets for both DRAM and NAND memory, all companies have to take this probe from China seriously. That said, memory cycles happen quickly, legal processes move more slowly. By the time the Chinese or the other parties can take action in court, the memory cycle will likely have passed its peak.
Despite Allegations, Memory Prices Continue to Drive MU Stock
Profit forecasts indicate the memory phase has come close to reaching its pinnacle.
Still, estimates seem unclear.
Wall Street estimates on a consensus basis that Micron will earn $11.36 per share in fiscal 2018. As of this writing, analysts estimate fiscal 2019 earnings of $10.48. However, estimates range from $6.92 per share to $12.50. Hence, some disagreement exists as to when the cycle ends. Still, stockholders can count on the cycle reaching an end point, just as previous periods have run their course.
Investors will likely receive more specifics on where the cycle stands soon. MU will report earnings after the bell on June 20th. Wall Street expects the company will earn $3.10 per share for the quarter that ending May 2018.
The company has beaten estimates in the 11 previous quarters. Given the history, one has to expect earnings will again top estimates this time. Investor focus will lie on memory pricing and guidance for future quarters.
Valuations Remain Stubbornly Low, Even by MU Stock Standards
Memory prices have shown signs of stability in recent weeks. However, they remain high for now. As long as memory prices remain high, MU stock should continue moving higher. At around seven times earnings I cannot recommend a sell. Still, the price-to-earnings (PE) ratio has presented a problem. In the previous memory cycle, the PE ratio moved into the teens. The multiple almost reached almost 20 at the end of 2013.
Yet this time, Wall Street has experienced substantial reluctance to take the PE ratio beyond the single digits. To be sure, it is NOT different this time. The memory cycle will eventually end. At that point, MU stock will see a huge downward move.
However, both cloud computing and self-driving cars consume large amounts of memory. While production will eventually catch up with demand, the market has not reached that point yet. Until signs that a memory price crash is coming become clear, selling off a high-growth stock trading at about seven times current earnings makes little sense.
The Bottom Line on MU Stock
MU stock should continue higher as long as memory pricing trends remain in place.
The Chinese government has become the latest in a large number of parties alleging price fixing in the memory market. However, as functions such as cloud computing and self-driving cars consume ever greater amounts of DRAM and NAND memory, prices should remain high as long as demand exceeds supply.
Micron’s earnings report on June 20th should give investors more insight on both memory prices and memory production.
From a long-term perspective, yes, the cycle will end and, yes, memory prices and MU stock will come down at that point. However, the market has not reached that point yet. Moreover, even for MU stock, a seven PE ratio remains low. Given that multiples reached the teens in previous cycles, I find it difficult to count out Micron at this stage.
Making money in MU stock involves keeping one’s eye on the ball. That ball is memory prices, and nothing else.
As of this writing, Will Healy is long MU stock. You can follow Will on Twitter at @HealyWriting.