Micron (NASDAQ:MU) memory chips play a critical role in the operation of the latest technologies. Nonetheless, MU stock has struggled as the Boise, Idaho-based firm faces challenges both at home and abroad.

Trade war-related concerns with China, as well as charges of price gouging, weighed on MU. But a more important issue to MU stock may involve the memory prices themselves. If history provides any guide, as long as memory prices head down, Micron stock will follow.

Micron’s Price Is Confusing

No doubt Micron has confounded the investment community. Many (including myself at one time) believed with the low price-to-earnings (PE) ratio should bring in buyers. Moreover, changing technologies have led to a seemingly insatiable demand for memory.

Artificial intelligence (AI), virtual reality (VR), augmented reality (AR), data centers, and other applications brought about high demand and the high memory prices that came with that demand.

However, even a PE ratio of about four and the tremendous chip demand, MU stock has fallen in recent months. Factors such as the U.S.-China trade war could have hurt Micron stock.

Accusations from China that Micron along with Samsung and SK Hynix had fixed prices added to the uncertainty.

Memory Prices and Micron Stock

However, I think the problem goes back to the issue I brought up in an earlier article. MU stock trades as a proxy for memory prices. Going back to the 1990s, MU stock reached high levels when memory prices became elevated. Conversely, Micron stock fell (sometimes by over 75%) when pricing in memory collapsed.

Today, memory has become more critical than ever. Micron, Samsung, and SK Hynix have shown a reluctance to increase production capacity. This makes sense as that could leave them with excess capacity should memory prices crash. It also means memory prices have remained elevated.

MU Tracks Memory Prices

However, a trend of memory price reductions has appeared. Not all of the pricing peaks occurred in May when the stock hit its 52-week high. Still, all have come down.

As a result, predictions for Micron earnings vary widely. Consensus earnings for 2019 so far have settled at $10.40 per share. This represents a drop from the $11.95 per share level of fiscal 2018. The range also varies between $7.75 per share and $12.61 per share.

The trend for 2020 appears even more unclear. Consensus earnings come in at $9.85 per share. That said, one analyst predicts only $4.48 per share in earnings. Estimates also go as high as $13.66 per share.

Determining which analysts forecasted accurately will come down to memory pricing. While disagreement remains, the trend points down. This likely explains why MU continues to fall despite its low multiple.

The low multiple remains equally confounding. Stocks in different areas of the chip sector such as Nvidia (NASDAQ:NVDA) or AMD (NASDAQ:AMD) maintain PE ratios well above the S&P 500 average. Even Intel (NASDAQ:INTC) holds a PE in the double-digits.

I recognized Micron stock followed the memory price trend over the summer and sold my position. Still, I must admit the trend makes little sense to me when the PE has fallen to about four.

Despite this PE, I would not buy Micron at these levels. Justified or not, I believe too many see the possibility of another 75-plus% decline from the highs.

As long as memory prices fall, I think the Micron stock price will follow. However, with the high demand we currently see, we cannot rule out a price recovery. If memory prices recover, I would recommend buying MU. For now, I recommend staying away from MU stock regardless of the price and even regardless of the PE ratio.

The bottom line on MU

Memory prices remain the primary driver of the price of MU. Micron stock continues to sell off despite an ultra-low multiple and the increasing importance of memory.

I believe the higher demand for memory will stay. If the market meets that demand, though, memory prices will fall and MU stock will follow. The technology world may have changed over the years. However, Micron stock’s ties to memory prices have not. Like in past decades, wherever memory prices go, Micron stock will follow.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.