Nothing has been going right for Micron (NASDAQ:MU) stock recently.

MU stock has dropped from $65 at the end of May to $45 today as a flurry of headwinds have hit the chipmaker. Industry insiders have issued warnings regarding lower pricing and slower demand in the memory market. Analysts have downgraded MU stock en masse on those same concerns, and investors have rushed to the exits.

At their core, all these concerns come back to one thing: the fear that the down-cycle in Micron is coming.

MU stock is notoriously cyclical. It booms when the music is playing and demand growth outpaces supply growth, creating a favorable pricing and profit situation for Micron. On the flip-side, it collapses when the music stops playing and supply growth outpaces demand growth, creating an unfavorable pricing and profit situation for the company.

Also, these switches happen quickly. Historically speaking, the music will be playing loud and clear one moment. The next, it’s gone, and MU stock is dropping like a rock.

Are we on the verge of this happening again? No one really knows, and ahead of the company’s earnings report due this week, that makes for a risky situation for MU stock. Still, risk looks mitigated because the stock has dropped so far, while reward looks huge because the valuation is so low.

As such, I think MU stock actually looks interesting ahead of the Q4 report. Personally, I’m not a buyer — too risky for me. But for investors looking for a high-risk, high-reward earnings play, MU stock might be a good pick.

Understanding the Micron Situation

The Micron situation isn’t that hard to understand.

This is a company that is prone to the vicious semiconductor cycle, where everything is determined by notoriously lumpy supply demand dynamics. Quite simply, MU stock soars when demand outstrips supply because chip prices are high and Micron’s profits are big. But, MU stock collapses when supply outstrips demand because chip prices are low and Micron’s profits are small.

The past several years have been characterized as a golden era for Micron. Demand has massively outstripped supply thanks to huge and growing markets like smartphones, IoT, automation, AI and cloud data centers. Meanwhile, the supply side has been weak because new chips are complex and increasingly difficult to make, creating a huge supply lull against a massive demand backdrop. Micron’s profits have consequently soared, and MU stock went from $10 to $60 in two years.

But, cracks are starting to form in this golden era’s foundation.

Supply is ramping. That is a big negative. It means that regardless of where demand goes, supply is starting to catch up. That means slimmer profits for Micron — and when Micron’s profits go down, MU stock drops. Plus, there have also been warning signs recently from industry insiders and analysts about stagnating demand. If that’s true, and demand weakens against a rapidly growing supply base, Micron’s profits could fall by a bunch. In that scenario, MU stock would drop a whole bunch, too.

As such, the Micron situation boils down to two things. Where is supply going? Where is demand going? Everyone knows the answer to the first question. Higher. But, the answer to the second question remains elusive. So long as that answer remains elusive, MU stock will trade at a distressed valuation.

Why MU Stock Could Pop, And Why It Could Drop

Fourth-quarter numbers and a fiscal 2019 guide will shed more light on the supply-demand situation for Micron. By shedding more light on this situation, fourth-quarter earnings will either reaffirm the bull thesis and cause MU stock to pop, or reaffirm the bear thesis and cause MU stock to drop.

I think the bull thesis is more likely to be reaffirmed. When you look at Micron’s end-markets, most of them are still growing at a pretty rapid pace. AI is in its relative infancy. So are the IoT and automation. Data centers are a more mature market, but the amount of the data in the world is still growing at a rapid pace, so data-center demand should remain robust.

Overall, I think the long-term outlook for demand is pretty good. Thus, regardless of where supply goes, demand should outstrip supply, and Micron’s profit situation should remain favorable. In such a situation, MU stock deserves to trade way above where it does today.

But, there is also a distinct possibility that this doesn’t happen. Instead, end-market demand may actually be weakening, and Q4 earnings may prove that. In that scenario, investors will sell first, ask questions later, and MU stock could drop like a rock.

In other words, Micron stock is a high-risk, high-reward play ahead of a very critical earnings report. The risk-reward looks skewed towards the upside because the stock is 30% off recent highs and the forward earnings multiple is below 5. But, the risk is still fairly big, so this isn’t an investment risk-adverse investors should consider until after the Q4 report adds more clarity to the supply-demand situation.

Bottom Line on MU Stock

I’m bullish on MU stock long-term, but I also realize that this stock tends to struggle when earnings are dropping — and earnings could drop over the next several years if demand weakens against increasing supply.

Consequently, the “wait and see” approach seems like the best one here. Wait for Micron to report earnings. See how the market reacts to those earnings. Avoid the stock if the outlook is bad and the stock drops big. Buy the stock if the outlook is strong and the stock regains some upward momentum.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities, but may initiate a long in MU within the next 72 hours.