Over the past few years we’ve seen memory chip maker Micron Technology (NYSE:MU) skyrocket, as the firm cemented its position as a leader in the memory industry. MU stock has performed exceptionally well since 2016, but the chip maker has had a rocky ride over the past 6 months, as investors question whether or not the firm’s rally is legit.
Concerns about trade tension and the cyclical nature of the memory industry have kept MU from breaking above $65, but it’s only a matter of time before the market recognizes Micron’s potential.
China Trade Tension
One of the biggest factors weighing on investor sentiment with MU stock has been trade tension between the US and China. Earlier in July, a Chinese court ruled that memory products made by Micron would be banned from being sold in the nation. The move comes as Beijing works to bring down the price of memory products and hit MU stock hard because the Chinese market makes up about a quarter of memory chip demand. The news also stoked concerns about the potential of a trade war ensuing between China and the US.
There’s really no way to look at this kind of news as a positive for MU — losing out on such a huge part of the market is never a good thing. However, it might not be as bad as it seems. The injunction blocking the sale of Micron products isn’t expected to have a massive impact on the firm’s performance — MU execs say the ordeal affects just over 1% of the firm’s sales and should only impact Q4 revenue by about 1%.
As far as a full-blown trade war between China and the US, that scenario looks unlikely. While tensions are certainly high at present, it’s the best interest of both countries to keep communication open and smooth things over as quickly as possible.
Cyclical Industry
Another reason traders have been cautious regarding MU stock is the fact that the firm operates within an industry that is highly cyclical. The rapid expansion of mobile has ramped up demand for memory chips — and that’s one reason companies like Micron have been performing so well. Some are worried that once demand starts to die down, MU stock will take a nosedive as the company tries to cope with fewer sales.
Again, it’s a valid concern — but, in the case of Micron, I don’t think a demand lull is anywhere on the horizon. While the firm does sell memory chips, which do tend to see cyclical demand, MU has been stretching its offerings into tech industries that are poised to explode in the years to come. Tech trends like artificial intelligence, autonomous driving and cloud computing are likely to support demand for MU chips for years to come.
Plus, Micron has been able to differentiate its products from competitors which will give the company a leg up should demand start to dwindle. MU is the only chip maker out there that offers chips with memory bandwidth speeds of more than 800 gigabytes per second, giving the firm a leg up on competition.
Why MU Stock Is a Value Play
Despite the fact that MU is expected to deliver impressive earnings growth over the next 5 years, the stock is still surprisingly cheap. At just $53 per share the stock is well below its 52-week high of $64.66 and trades at just 4.5 times its forecasted earnings. That’s far lower than the rest of the tech sector as well as the market as a whole. Plus, many are expecting to see MU conduct a series of buybacks which would take the firm’s current 5.4 P/E ratio even lower.
The Bottom Line on MU Stock
It would be remiss to say that MU stock doesn’t come without risks, and the issues with China are likely to cause volatility for the stock in the near term. However, the firm’s valuation doesn’t stack up with its growth potential. The memory chip space might see demand start to fall in the far-off future, but with mega-trends like autonomous driving in the very early stages, such an event looks unlikely any time soon.
If you’re looking for a value play, MU is one of your best bets right now.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
