Credit Suisse analyst John Pitzer isn’t wrong about Micron Technology (NASDAQ:MU). The stock is “extremely cheap” right now. Likewise, Appaloosa Management’s David Tepper isn’t necessarily wrong to continue plowing into an ever-bigger stake in Micron stock.
The world’s computers, servers and mobile devices need more and more memory, and Micron is the creme of the crop of the DRAM market.
Both calls, however, violate one of the first and simplest cardinal rules of owning stocks. That is, don’t fight the tape. Certainly there will come a time when Micron stock bounces back from what’s become more than a 30% setback from its late-May peak.
This is a case, however, where traditional thinking may not apply.
What They Said
It’s not exactly easy to argue against Pitzer’s stance that, “Unless the world begins to create less data and/or data becomes less valuable, memory will continue to grow in importance relative to compute architectures.”
The advent of cloud computing and the introduction of Windows 10 (along with the rollout of more powerful mobile technologies) has greatly enhanced demand for the computing power needed to get the most out of modern hardware and software.
It’s also difficult to argue Pitzer’s claim that MU shares are “extremely cheap” right now. The trailing P/E of 4.4 and a perfectly plausible forward-looking P/E of 3.8 is jaw-droppingly low compared to Micron’s history and compared to its technology peers.
As for Tepper, he largely reiterated the Credit Suisse premise, saying, “The demand side is going to be good for a long time. Servers, cloud and if you have smart cars. I mean there is just a great future for this stuff [memory chips].”
Neither of these professional stock-pickers, however, is quite looking at the matter through the right lens.
Reality Check on Micron Stock
In a perfect world, trading would make some modicum of sense. A stock would more or less trade in-line with its peers in terms of valuation, with each stock’s price adjusted higher or lower to reflect that company’s likely future, at least to the extent it could be predicted.
We don’t live or trade in a perfect world though. We live and trade in an environment where sentiment and relativity can hijack some stocks. Pitzer even conceded that fighting negative momentum often is futile.
That’s clearly been the case with Micron stock. A trailing P/E of 4.4 and a projected one of 3.8 would be unthinkable is almost all cases. For Micron stock though, the masses collectively feel it’s the right call.
That’s not to suggest it’s the rational call. It’s the one most investors are agreeing on though, and that’s the only one that matters.
A great deal of this drag has to be spurred by memories of what happened between 2013 and 2016. That was the year an increase in DRAM prices spurred a surge of new production capacity from DRAM-making rivals like Samsung Electronics (OTCMKTS:SSNLF) and SK Hynix.
The industry overshot though, creating a glut of memory chips that ultimately cut DRAM prices in more than half.
The market recovered, but not so much because prices bounced back. Mostly, demand caught up with supply, and memory makers scaled back on production just a bit.
Nevertheless, it was a tough, scary time for many Micron stock owners. The stock lost more than two-thirds of its value between late-2014 and early-2016. Investors aren’t going to be blindsided again, even if the risk of being blindsided doesn’t actually exist like it did then. Memory makers have exercised at least a bit more restraint than they did just a few years ago when the glut materialized.
Welcome to trading, where perception and presumption is more than half the battle.
Looking Ahead for Micron Stock
Whatever the case, look for some sort of fireworks and pressure in one direction or the other on Friday of this week. Or, more specifically, look for some major action after Thursday’s closing bell rings. That’s when Micron will be reporting its fiscal fourth quarter numbers.
As of the latest look, the pros are looking a profit of $11.77 per share, more than doubling the year-ago bottom line of $4.96 per share of Micron stock. Revenue is expected to be up nearly 49%, to $30.2 billion.
Those numbers are impressive to be sure, though that may end up being irrelevant as well. Investors are far more interested in where Micron thinks things may be ultimately pointed.
Ergo, investors will be looking to “read between the lines,” even if there’s nothing between the lines to read. The report’s tone and rhetoric will likely trump whatever the actual numbers say.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.