Micron Technology (NASDAQ:MU) has become a battlefield stock, as analysts debate whether memory chip prices are falling or crashing. But it’s clear that MU stock is facing a deteriorating supply-demand dynamic and increasing competition from China. It will be difficult for Micron’s CEO, Sanjay Mehotra, to overcome these challenges. I think he’ll triumph in the end, but I believe that MU stock is going lower until he does so.
MU is the leader of the chip memory market. Specifically, it has about a 12% share of the global NAND or flash market, and the company has a 21% share of the global DRAM module market.
Memory prices have always been volatile, and memory chip stocks have always been cyclical. Unlike the microprocessor and graphics chip markets, where there can be debates about whose products are better, memory products are true commodities. High prices cause new supplies to come on the market and those new supplies cause prices to fall.
That’s what has happened now. The question is whether we’re about to see the same kind of crash that caused major problems for MU in past years or whether the situation will be different this time.
Why Is the Situation for MU Different?
To see why this time might be different, look at my desk.
I recently had to replace the hard disk on my desktop computer, and instead of getting a new hard disk, I bought a 500-gigabyte-chip-memory module.
That has been happening a lot, across all devices. Phones only have chip memory. Laptops mostly use chip memory. I chose chips for my desktop because chips use less power, they last forever, they’re faster, and their cost is now competitive with spinning hard drives, which have moving parts.
Even in cloud computing centers, the advantages of chip memory are becoming obvious. On the “front end” of the cloud, where data needs to be available immediately, chips are replacing hard disks, which are now being relegated to long-term storage facilities.
This reality caused Western Digital (NASDAQ:WDC) to buy memory module maker SanDisk, back in 2016. SanDisk’s CEO at the time was none than Sanjay Mehotra, the current CEO of Micron.
Why Is the Situation for MU the Same?
While there has been a secular shift in memory, working to the advantage of chips, chip makers have recognized the change and are rapidly adding new chip capacity.
Intel (NASDAQ:INTC), Samsung Electronic (OTCMKTS:SSNLF) Korea’s SK Hynix, Western Digital and MU have all launched new memory plants.
More importantly, China is now working hard to make itself independent of foreign memory chip suppliers. Beijing-backed Tsinghua Group has been accused of stealing Micron’s designs and other new Chinese suppliers, like Yangtze Memory Technology Group, are building memory capacity as fast as they can.
Thus, it is presumed, a bigger boom is just leading to a bigger bust. Goldman Sachs is warning that the group has “weak fundamentals”, and flash memory prices are expected to fall another 10% this year. Words like “crash” are being thrown around. A new chip technology called QLC is also increasing memory supplies.
The Bottom Line on MU
Micron stock presently sells for a price to earnings multiple of 4.4, but ignore that figure since it’s based on the boom times of the last 12 months.
Before the coming bust became obvious, MU stock was outperforming the semiconductor group. Meanwhile, private equity billionaire David Tepper says he is still “very, very long” MU.
It’s true that demand for memory will continue to rise, as cloud data centers, phone makers, PC buyers and companies building autonomous cars and the Internet of Things utilize ever-increasing amounts of memory.
But it’s also true that new memory supplies are rapidly coming online, and that China is determined to gain a positive balance-of-trade in chips against the U.S. Memory chips are the tip of the spear. Those headwinds will cause Micron stock to drop for some time.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, 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 no shares in companies mentioned in this article.
