Micron (NASDAQ:MU) stock has recovered somewhat from a drop in NAND and now DRAM memory prices. Falling demand wiped out almost half of the value of Micron stock despite rock-bottom price-to-earnings (PE) ratios.
More recently, it has recovered somewhat amid a more general stock price recovery.
Still, analysts expect profits to fall every year for at least the next three years. Due to this prediction, the pain for Micron stock will likely continue.
If observers take the time to observe the patterns that have driven MU stock for decades, though they can better understand and more easily profit from investments in MU.
Product Pricing and Micron Stock
MU stock saw a recent recovery from its plunge to its low of $33.82 per share. As I argued many times before, Micron stock remains a proxy for memory prices as it always has. Now, with falling demand, memory supplies have increased and prices have fallen. This has taken Micron down from highs of almost $65 per share.
My colleague James Brumley came up with a relevant comparison by comparing memory chip business with the oil and gas industry. Micron acts as the Chesapeake Energy (NYSE:CHK) or the ConocoPhillips (NYSE:COP) of the tech industry.
Like exploration and production (E&P) companies in the energy industry, the stock rises when commodity prices are higher. When these prices plunge to low levels, their company stocks also see a massive drop.
Micron tends to behave in a similar manner. However, since its direct peers Samsung and SK Hynix do not trade on major U.S. exchanges, this may not appear as apparent to American tech investors. Unfortunately for owners of MU, “drilling” for memory chips has become less profitable as the market has become oversupplied.
The Seasons of MU stock
For this reason, MU stock will again follow the pattern of the seasons. With the “summer” of high memory prices over, MU stock now sees a “fall” season and a corresponding fall in its stock price.
Earnings projections confirm this pattern. Analyst forecast earnings of $10.19 for fiscal 2019. However, they also predict $6.67 per share for fiscal 2020 and only $3.55 per share for 2021.
Many blamed the U.S.-China trade war. While that may explain some of the drop, I think memory pricing better explains why investors shrugged off a PE ratio of around six when the stock price peaked.
This also describes why MU fails to induce widespread buying at its current PE ratio of about four. As a result, “winter” is coming, but how long or brutal the winter becomes remains unknown.
On a positive note, Micron may see less painful downturns in the future. In previous years, PCs primarily drove memory chip demand.
Today, the Internet of Things, artificial intelligence, data centers, and other applications has brought a sustained increase in demand for memory chips. While I do not expect price cycles to go away, I think this will ease the pain of memory price downturns.
Also, as memory demand again rises, memory prices should turn around long term. This would bring the “spring” and “summer” MU stock needs to move higher again. However, until it becomes clear that winter has ended, prospective buyers should probably stay away.
The Bottom Line on Micron Stock
The recent drop in MU stock again confirms that profiting from Micron involves understanding the seasons of this equity. I said in previous articles that MU acts as a proxy for memory prices. The recent drop again confirms this. Falling memory prices and lower profit forecasts ended yet another bull market for the equity.
However, the latest tech innovations will ensure stronger memory demand than in previous years. As Micron’s winter arrives, prospective buyers will again see a lucrative opportunity to go long.
MU stock investors will likely never profit from a buy and hold strategy. Still, if investors pay closer attention to MU’s patterns, profiting from MU stock could become as simple as understanding seasonal change.
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.
