Shares of chip maker Micron (NASDAQ:MU) have been on a roller coaster ride over the past year. Twelve months ago, Micron was a $40 stock. Then secular growth tailwinds in the company’s core addressable markets enabled MU to generate record revenue and profits, causing Micron stock to rally to $65 in May.
But warning signs started to emerge, indicating that surging supplies of memory chips were lowering demand for the chips. Micron’s quarterly numbers gradually confirmed those warning signs, and MU stock dropped from $65 in May to $35 in October.
Micron stock, however, has undergone a noticeable reversal recently. The stock bounced sharply off of its $35 lows and reversed course on higher-than-usual volume to prices above $40. Was that the big reversal everyone has been waiting for? Is the selloff of Micron stock over?
Perhaps. The long-term fundamentals supporting Micron stock remain very strong. With MU stock at $40, those long-term fundamentals are both greatly underappreciated and undervalued. The market may finally be looking past near-term noise and seeing the promise of those long-term fundamentals. If so, this recent rally of Micron stock could continue.
But there is no guarantee that this will happen, and there is no guarantee that this recent rally is anything more than a dead-cat bounce. Micron stock is still facing high near-term risks. Until the company’s quarterly results confirm that its supply-demand dynamic has stabilized, the upside of Micron stock will be limited while its risks will remain elevated.
The Long-Term Fundamentals of Micron Stock Are Promising
MU is a chip maker with robust exposure to multiple, long-term secular growth markets like artificial intelligence, Internet of Things, data centers, automation, so on and so forth. As long as demand from these end markets remains robust, Micron stock is supported by healthy long-term fundamentals.
Demand from these end-markets should indeed remain robust. Just look at the current trends in the world. Consumers are more addicted to their phones than ever before. They are also now increasingly addicted to smart TVs, smart watches, and other smart devices which are just starting to gain traction. Thus, the growth outlook of IoT is quite promising.
Also, most enterprise and individual workloads will move to the cloud. According to estimates, just 20% of workloads has been moved to the cloud so far. Inevitably, this will head towards 100% over time. As it does, hyperscale data-center operators will have to build bigger and better data centers. Thus, the outlook for data-center growth is also quite promising.
Meanwhile, AI is still in its relative infancy in terms of proliferation around the world. Eventually, AI-influenced technologies like automation and voice assistants will be everywhere. They are hardly anywhere today. Thus, the growth of AI is still in the top of the first inning.
Put it all together, and the long-term fundamentals supporting Micron stock remain quite robust. Indeed, they are stronger today than they have ever been before, mostly because technology’s global sphere of influence today is larger than ever before and growing. Thus, while supply gluts can negatively affect Micron stock in the near-term, the long-term demand outlook supporting this stock will remain robust for the foreseeable future, giving Micron stock enough firepower to head higher.
Near-Term Noise Creates an Elevated Risk Profile
Although the long-term growth outlook of MU stock is powerful, stocks are all about timing, and it doesn’t feel like the right time to buy MU stock yet.
Multiple semiconductor companies, from Micron to Texas Instruments (NYSE:TXN) to STMicroelectronics (NYSE:STM) and everyone in between, are warning about slowing demand. That is supported by capital-expenditure trends. Although major data-center operators continue to increase their capex spending, some of the more notable players are starting to slow their capex growth rates. Facebook (NASDAQ:FB) recently lowered its FY18 capex guidance from $15 billion to $14.25 billion, while Microsoft (NASDAQ:MSFT) noted that its capex growth rates will moderate going forward.
Meanwhile, rising supply has been an issue for some time. So semiconductor companies are being hit by slowing demand and rising supply.
But that situation won’t be permanent. As I noted earlier, semiconductor demand has healthy, long-term drivers. But demand won’t head higher in a straight line. The increase will be lumpy, and right now, it increasingly looks like tariffs and a global economic slowdown are dampening near-term demand.
It will be tough for MU to rally meaningfully with demand slowing and supply rising. Instead, MU stock won’t recover until the company’s numbers affirm that supply and demand have stabilized. The company’s gross margins are a good indicator of the supply-demand dynamic. MU’s quarterly guidance is calling for its gross margins to drop sequentially, implying that supply growth is outpacing demand growth. As long as that remains true, Micron stock will struggle.
But a stabilization of Micron’s gross margins will indicate that supply-demand dynamics have improved. For investors seeking to mitigate near-term risk, that will be the buy signal.
Bottom Line on Micron Stock
The long-term fundamentals of MU are promising, but its near-term risks are elevated due to an unfavorable supply-demand dynamic. As a result, investors will want to wait until MU’s gross margins stabilize, indicating that supply-demand dynamics have improved, before buying MU stock on its current weakness.
As of this writing, Luke Lango was long FB and MSFT.
