Micron’(NASDAQ:MU), like most semiconductor firms, has had a schizophrenic journey this year. During most of the first half of the year, MU stock appeared to build off last year’s momentum, reaching a 52-week closing high of nearly $63. If 2018 had ended at that point, Micron stock would have returned over 50%.
Unfortunately, things went downhill from there. At the end of May, Micron stock absorbed a body blow, then quickly tried to recover. However, that rally petered out, and MU stock subsequently stayed in a bearish trend channel. Other chip makers’ stocks performed similarly.
The most significant factor pressuring the MU stock price today is the company’s first-quarter earnings report. The company’s slightly higher-than-expected earnings per share couldn’t compensate for the fact that its revenue came in well below analysts’ consensus estimate. The consensus forecast called for $8.02 billion, but the tech firm’s top line came in at only $7.91 billion.
On paper, a 1.4% revenue miss doesn’t seem terrible, given the sector’s weakness. However, MU’s sales growth decelerated last quarter, coming in at an 18% year-over-year increase, down from a 38% jump during the previous quarter.
Is it time to finally dump MU stock or has the shares’ decline created a buying opportunity?
The Bad News Is Priced Into MU Stock
The large decline of Micron stock is understandable. Aside from the revenue miss, management provided disastrous Q2 guidance. MU now forecasts revenue of $5.7 billion-$6.3 billion, well below the prior consensus estimate of $7.26 billion.
Moreover, the markets are not punishing MU stock exclusively. After reporting their own results, the shares of Micron’s rivals Intel (NASDAQ:INTC) and Advanced Micro Devices (NASDAQ:AMD) also fell by large amounts. Investors fear that demand for chips has started to fade dangerously, and Micron’s earnings didn’t help assuage that belief.
Pouring salt on open wounds, Apple (NASDAQ:AAPL) announced that consumers are upgrading their smartphones at a slower rate.
Obviously, lower smartphone demand creates lower incentives to ramp up memory-chip production. In turn, this trend justifies the volatility of MU stock. But the flip side to this story is that the bad news is fundamentally baked into Micron stock.
As far as the disappointing guidance, Micron CEO Sanjay Mehrotra noted that “inventory adjustments” had pressured the company’s revenues. In an interview with Jim Cramer, the CEO said that MU’s inventory stockpiles had jumped due to previous, unprecedented demand.
Let’s read between the lines: he’s talking about cryptocurrencies. As long as prices for blockchain assets remained relatively elevated, crypto miners could enjoy profits from their efforts. But with current prices so low, mining has become unprofitable, causing demand for mining equipment to drop, leading to the inventory build.
But these are not new, groundbreaking developments. What we’re likely seeing here is the last of the weak hands dumping MU stock. But as InvestorPlace’s Chris Lau emphasized, Micron stock enjoys several largely ignored tailwinds.
Micron Stock Should Benefit From Ongoing Strong Demand
Another reason why investors abandoned MU stock is the volatility of cyclical demand. Providing a clear-cut example of that phenomenon is the crypto sector’s travails.
When digital assets are flying off the shelves, semiconductor firms can’t meet demand quickly enough. For instance, speculative crypto trading drove up prices wildly, thereby incentivizing the mining of-chips and components. But when prices crashed, the market for mining equipment plummeted like a ship off the edge of a flat planet.
Moving forward, though, demand for Micron’s chips should continuously increase. Among the many innovations that will boost Micron stock is automated-driving technologies. For clearly logical reasons, companies must perfect automated driving before it becomes mainstream. As a result, there probably won’t be wild demand dynamics in that market.
My main caveat is to respect the markets. No matter where you invest, you should anticipate a turbulent ride. But for patient investors, I’m confident that MU stock has reached a compelling entry point. The company has more than enough positive attributes to overcome its difficulties.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
