Truth be told, investors were quietly anticipating a turnaround by Micron Technology (NASDAQ:MU), given the 30%(+) rebound MU stock has dished out since its late-December low.
Thursday’s 10% post-earnings gain by MU stock simply underscores that optimism. While MU’s fiscal Q2 numbers weren’t great, they topped estimates, and the company believes that a DRAM pricing rebound will take shape in the latter half of this year.
And yet, it’s not quite the ideal time to wade back into Micron stock. It’s getting close, but this entry point is a little less than perfect. Would-be buyers of MU stock may want to wait for the dust to settle and step in when the volatility of Micron stock has cooled.
Earnings Bottomed
For the quarter ending in February, computer-memory maker Micron turned $5.84 billion worth of revenue into an operating profit of $1.71 per share. Both were better than expected. Analysts were calling for earnings of only $1.67 per share of MU stock and sales of $5.82 billion.
Still, the company’s top line sank 21% year-over-year, and its operating earnings were off to the tune of 39%.
The slump from year-ago numbers is entirely a reflection of waning DRAM and NAND prices… the two kinds of memory that most modern electronic devices require to function. Sixteen gigabytes worth of DDR4 DRAM memory chips are selling for almost half of their early 2018 prices, as a supply glut chewed away at MU’s pricing power.
Micron, along with rivals Samsung (OTCMKTS:SSNLF) and SK Hynix, over-aggressively ramped up production in 2017, looking to capitalize on then-rising memory prices.
The worst period for MU stock may be coming to a close, though. CEO Sanjay Mehrotra commented “Although fiscal Q2 pricing came in below our expectations, we are optimistic that demand elasticity and seasonal trends will support improving demand growth in the second half of the calendar year.”
Even though some analysts are skeptical, most investors aren’t.
In a way, both groups may be right.
This Time Is Different
The price-crimping memory glut is nothing new. The industry saw one take shape quite decisively in 2015, as well as in 2011. MU stock struggled in both instances.
But investors are reacting to this glut differently. This time, having learned from the prior two gluts that they eventually come to an end, investors anticipated the rebound of MU stock. In fact, they over-anticipated it, lifting MU stock too far, too fast, so to speak.
The 2013 rebound that followed the 2011 DRAM glut was a slow, rolling, methodical affair.
So was the 2016 turnaround from the 2015 headwind.
This time, however, has been unlike the outcome of prior gluts and recoveries. This time, a V-shaped turnaround has taken shape, and rather than gradually accelerating out of a rut, Micron stock has bolted out of it. The pace is too hot, and thanks to Thursday’s bullish gap, those who doubt MU stock have another reason to take profits.
But the price action of MU stock is understandable. History has shown that the memory supply glut/recovery cycle is reliable enough to preemptively gamble on. BMO Capital Markets analyst Ambrish Srivastava notes the company is helping itself, too, by shuttering some production and lowering capital expenditures, enabling excess supply to be soaked up.
Evercore ISI analyst C.J. Muse adds that MU stock may benefit from a tailwind, driven by a seasonal increase in smartphone production and the ongoing growth of data centers operated by major cloud companies like Amazon.com (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).
The trick will be figuring out the exact timing of the DRAM price turnaround and determining when investors will start to price that into the value of MU stock. The two may not take shape at the exact same time.
Looking Ahead for MU Stock
The reversal of MU stock since late-December has been impressive, as was the renewal of that rally since early March. However, Thursday’s big jump — which left behind a gap — has made it very difficult for MU stock to continue rallying without peeling back and regrouping first. That regroup could be a multi-week or even a multi-month process.
Or maybe that’s not what has to happen at all.
While the rally was (not surprisingly) stopped cold at the green 200-day moving average line on Thursday, anything’s still technically possible. If MU stock can hurdle that moving average line within the next few days, it’s possible investors will see that as a bullish catalyst and begin buying into it in earnest.
There’s certainly no valuation problem for MU stock at its current level of only 7.5 times the coming year’s expected earnings. But such a thrust may also turn into a proverbial “last hurrah” for the current upward push of MU stock.
More realistically, traders will likely see that the recovery from December’s bottom has not only been a little too hot, but that it’s been a little too volatile. The market may ultimately choose to let Micron stock settle down at its current level.
That stability may materialize right around the time we get a meaningful grasp on whether or not DRAM prices are truly rebounding.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
