When it comes to chipmaker Micron (NASDAQ:MU), the investment thesis is exceedingly simple. You want to own Micron stock when the music is playing, and you want to avoid it when the music isn’t playing.

What exactly does that mean? The semiconductor industry, and thereby Micron, are notoriously cyclical. They are driven by supply-demand economics which constantly fluctuate between eras of low supply and high demand and eras of high supply and low demand.

The music is playing for Micron when we are in era of low chip supply and high chip demand. We were in that era for essentially all of 2016, all of 2017, and the first half of 2018, as secular demand tailwinds converged on a limited supply base. That caused Micron’s revenue and profits to soar, which powered a six-fold increase in MU stock.

But, around June of 2018, there were signs that the music was going to stop playing. Namely, significant supply ramp threatened the era of low supply and high demand. Ever since, the music hasn’t played for Micron.

The market has been constantly worried about profit erosion, and Micron stock has dropped in a big way.

The unfortunate reality is that Micron stock isn’t a buy yet. Why? The music still isn’t playing. It might start playing again soon, but investors would be wise to wait for confirmation that things will get better before buying into this fallen stock.

Micron & the Music

The situation at Micron always boils down to simple supply-demand fundamentals in the company’s core DRAM and NAND markets. When those supply-demand fundamentals are favorable and project to remain favorable, Micron stock does well. When those supply-demand fundamentals are weak or project to be weak, Micron does poorly.

The past two years have been defined by an era wherein supply-demand fundamentals have been favorable and projected to remain favorable. You had huge demand tailwinds from burgeoning industries like cloud data-centers, AI, automation, IoT, self-driving, so on and so forth.

Meanwhile, these new industries required complex chips, and the production capacity wasn’t ready to handle volume production of these complex chips. Thus, you had greatly limited supply. Big demand plus limited supply equals huge profit gains for Micron, and equally big gains for Micron.

The situation is different today. Supply-demand fundamentals remain favorable, but not as favorable as they have been. Last quarter, revenues rose 38% year-over-year and gross margins expanded 50 basis points sequentially.

Those appear like great numbers on their own. But, with respect to previous quarters, they imply a significant slowdown. In the year ago quarter, revenues rose 91% year-over-year and gross margins expanded 330 basis points sequentially.

Worse yet, the outlook isn’t all that rosy. Industry insiders and analysts have been warning about supply ramp dragging chip prices down, and Micron’s guide seems to confirm this. Specifically, first quarter gross margins are expected to be lower than fourth quarter gross margins. A year ago, first quarter gross margins were 410 basis points above fourth quarter gross margins.

In other words, this whole narrative is slowing down. That means the music has stopped playing. When the music isn’t playing, you don’t want to own MU stock.

MU Stock Is Near-Term Pain, Long-Term Gain

From where I sit, this looks just like a temporary pause in the music for Micron.

Everyone is concerned about supply ramp and price drops. These are reasonable concerns. Supply is ramping, and that will inevitably cause prices to drop. Consequently, Micron’s margins will also fall, and profits will erode over the next several quarters.

But, this doesn’t seem like a permanent thing. Demand remains robust, and projects to remain robust for the foreseeable future given secular growth trends in the company’s end-markets like AI, cloud, and IoT. Eventually, then, still-robust demand and bigger supply will find a balance, profits will stabilize, and Micron stock will rebound.

Until that happens, you don’t want to own Micron. The market is scared of this name during profit erosion eras, and rightfully so. Just look at what has happened to this stock before during profit erosion eras.

You’ve had multiple massive wipe-outs over the past two decades that took Micron stock down to $10 or lower. Because investors are afraid of this repeating, they will need sound confirmation that it isn’t happening again before pushing this stock higher.

Thus, until you get that sound confirmation likely through gross margin stabilization, you shouldn’t buy into Micron.

Bottom Line on MU Stock

The music has stopped played for MU stock, and that means it is time to stay away. Eventually, the music will come back. But, until it does, Micron stock isn’t a buy.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.