To be clear, the oversupply concerns that have plagued Micron Technology (NASDAQ:MU) shares for weeks now are completely valid. Micron stock has fallen as much as 40% just since June on this deteriorating dynamic.
In short, the world doesn’t need as many memory chips as Micron and rivals like Samsung (OTCMKTS:SSNLF) and SK Hynix are collectively making. The glut is forcing the price of DRAM (dynamic random access memory) modules so low that it’s increasingly tougher to make a buck in the business.
What if, however, the doubters made far more out of the worry than was necessary?
I contend that’s the case, setting MU stock up as an extreme value play for the moment when the overwhelming army of pessimists realizes they’ve overshot their target by a country mile.
Been There, Done That
The short version of a long story: The technology industry isn’t immune to the allure of ramping up production when demand is strong and prices for hardware are high. Problem is, demand for tech tends to be cyclical, and all too often overproduction ends up up-ending the strong hardware prices that were so compelling in the first place.
It’s not like investors haven’t seen it before. The 2014/2015 meltdown in crude oil prices was ultimately driven by an overly aggressive response to 2013’s peak prices of around $100 per barrel. Too many drillers opened up too many spigots, creating a supply glut that couldn’t be contained once it developed momentum the next year.
It happened within the solar panel market too, way back in 2009. Solar power had just become cheap enough on a wide scale, but panel prices were still firm enough to encourage new production of them.
The dynamic didn’t last, of course. Too much supply and continued technological advances (along with only a lukewarm interest in making the switch to solar power) led to the destruction of many of the industry’s weaker players.
Ironically, investors have even seen an over-reaction to strong prices in the RAM market lead to a destructive glut. Micron stock owners were reading the same alarming headlines they’re reading now back in 2015.
To their credit, investors have learned their lesson. Problem is, they may have learned it a little too well.
Held Back by Fear
Who can blame shareholders for being worried, particularly when analysts are helping them come to such conclusions? Just last month Morgan Stanley analysts led by Craig Hettenbach wrote: “The biggest difference in semi fundamentals today vs. the last correction seen in 2015 is in the degree of excess that built up in the supply chain this go-round.”
If that is indeed the case, the fact that the current MU stock price is still 300% above its early-2016 post-glut low makes it look and feel like shares are vulnerable to even more selling.
And maybe they are.
Just for the record though, even with the 500%(+) runup from Micron stock between early 2016 and June of this year, the stock’s trailing P/E ratio hasn’t been above 8.0 in over a year.
Investors are holding back, fearful of a repeat of 2015’s big selloff.
In most regards, that fear is understandable. Context is everything, and the computer technology market is forever changing. A company’s trajectory is often a bigger driver of its stock than the stock’s actual value, and it’s difficult to argue Micron’s present trajectory isn’t grim given the verified downtrend in DRAM prices.
The problem is, this stifling fear may also prevent investors from tapping into the upside potential of Micron stock when, not if, the glut finally abates. T
hat could be months or even years down the road, but with the stock so disconnected from the memory market’s dynamics (MU stock is now trading at only 4.1 times next year’s projected earnings) a proverbial wake-up call to reality could prove explosive for this particular equity. You don’t see many single-digit P/E ratios on Wall Street these days.
Bottom Line for Micron Stock
That’s not a bullish call. Or, maybe it is. More than anything though, it’s a clarion call for all investors to think carefully and critically about the possibility that they’ve collectively undervalued MU stock for all the wrong reasons. Not that it entirely matters if they have. If fear of a glut is enough to keep a stock’s price suppressed, the reason is irrelevant. It’s a suppressed stock.
All the same, this is a scenario that somehow seems to ultimately set the stage for a big bounce, just like 2016’s. Once fear starts to evaporate, that evaporation tends to accelerate.
The hardest part is waiting for everyone else to figure it out.
By the way (and for what it’s worth), though the world saw an oil glut in 2014 and a solar panel glut in 2009, it’s not like consumption of either slowed afterwards. We’ll burn a record amount of crude oil this year, and solar panel installations continue to break records.
It never was a demand problem. It was a supply and pricing problem, which is the better problem of the two to have. The DRAM dynamic isn’t much different now. Micron has a market to sell to. That’s half the battle already won.
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.