Along with many other tech companies, Micron Technology (NYSE:MU) stock has pulled off an impressive rally so far this year. Micron stock has logged a return of 29%.
Among other chip makers, Intel (NASDAQ:INTC) is up 6.5% and Broadcom (NASDAQ:AVGO) is up by a similar amount.
So what happened? Why has Micron stock rallied so much? Well, there has been some bullishness on the macro level. The Federal Reserve has hinted it will hold off on raising interest rates. There have also been encouraging signs that the U.S. and China will come to an agreement on trade.
But perhaps the biggest factor driving MU stock has been that negative sentiment towards the name had gotten to extreme levels. From June 2018 until December 2018, Micron stock went from $61 to $39. So it seemed like a pretty good bet that MU stock would bounce.
Micron Stock And Its DRAM Business
When it comes to the massive DRAM-chip industry, MU is the world leader. The company will also become a top player in the critical flash-NAND technology market. That’s because MU is acquiring the shares it doesn’t already own of its joint venture with INTC.
The market for memory chips in general and DRAMs in particular is also highly consolidated, with a few mega players like Samsung Electronics (OTCMKTS:SSNLF) and SK Hynix. As a result, the market has not been oversupplied.
Yet there is still a nagging issue: deceleration of demand. Part of the deceleration was caused by a slowdown in spending on the cloud and smartphones, as seen in Apple’s (NASDAQ:AAPL) results.
But China is still a major headwind for MU and MU stock. Even if China and the U.S. reach a trade agreement, China may still weigh on MU stock. The fact is that the country’s economy could be at a negative turning point, as Beijing’s stimulative actions have proven to be mostly ineffective.
On Micron’s latest earnings call, MU CEO Sanjay Mehrotra said: “As we enter calendar 2019, we are seeing weakening demand from our customers. As a result, we are taking decisive actions, including a meaningful reduction in our fiscal 2019 CapEx plan, in both DRAM and NAND that will materially reduce our supply bit growth.”
Note that he provided terrible guidance for fiscal Q2, indicating that MU’s revenue would range from $5.7 billion to $6.3 billion. The Street, on the other hand, was looking for a much more robust $7.2 billion.
Yet that should have not been too much of a surprise. Memory is a commodity business, making it subject to cyclical swings in supply and demand. Unfortunately, after several years of a nice uptrend, it looks like things are going into reverse.
The Bottom Line on Micron Stock
The last time the DRAM market took a hit, back in 2015, Micron stock plunged to $10, showing how brutal the segment can be.
So could Micron stock suffer a similar fate in the coming year? Probably not. MU has a solid balance sheet and is working hard to reduce its capacity. The valuation of Micron stock is also fairly low, with a forward price-earnings ratio of only six, and the company has plans to buy back a whopping $10 billion of Micron stock.
But all this does not mean that MU will somehow return to its glory days of 2016 to 2018. For the most part, its performance will likely be choppy as its headwinds continue to linger. So holding off on buying MU stock is probably the best course for now.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
