As the chip glut has continued, memory chip maker Micron Technology (NASDAQ:MU) has become the cheapest stock on the market. You could buy it for 3 times the previous-12-months earnings as trade looked ready to open for trading June 24 at about $33 per share.
But analysts are still not pounding the table for the stock, and for good reason. The company is due to release results for its May quarter on June 25, and it’s going to be very, very bad.
The latest estimate on revenue is $4.7 billion, down 40% from last May’s $7.8 billion. Earnings are estimated at just 75 cents per share, down from last year’s $3.10 per share.
But if that’s the bottom, you’re still looking at a forward price-to-earnings ratio of 8 if you buy today, which is why the average rating on the stock remains overweight.
Victim of the Trade War
Micron is a victim of the U.S.-China trade war. Its memory chips are bought by Chinese companies for products that are re-exported to the U.S. This has been the global tech business model for decades now. America has the intellectual property while China has the low-cost labor and gets the environmental damage.
But this can’t continue, for two reasons. Tariffs are the first reason. But China itself is starting to pay its people more and wake up to its own environmental degradation. The game has a sell-by date.
It’s just ending faster with the tariffs. The launch of a Chinese memory chip pushed Micron shares to new lows. China represented 57% of Micron sales during the good times, last year. It’s not just that China is investing heavily in its own memory chip capacity. The glut lets it supply its needs today through Micron competitors like Samsung Electronics (OTCMKTS:SSNLF) and SK Hynix.
As a result, JPMorgan Chase (NYSE:JPM) cut their estimates on Micron again last week. But it’s so cheap they still have it at overweight, and their low-end 12-month price target of $50 per share is still a 50% gain from today’s $33.
The Super Cycle for Micron
Further optimism comes from the “super cycle,” which was the talk of the town during the boom.
Low memory prices mean chips are replacing spinning disks in a host of applications. The main memory drive on my own PC is now chips, which have no moving parts and are thus more reliable. Because chips move data faster than hard drives clouds are using them, the premium paid over hard drives is disappearing. Then there are all those new markets, like intelligent speakers and the “Internet of Things,” adding computers to jet engines, refrigerators, and cars.
The glut has produced bargains. I bought a 512 GB chip-based hard drive last year for about $150. You can now buy a 1 TB chip drive for under $100.
We’re in a golden age of memory, one that is going to continue. Bulls insist the present glut will ease. Bank of America (NYSE:BAC) analysts say buy now.
The Bottom Line on MU Stock
If Micron had initiated a dividend before the glut, even a small one, it would be easy to recommend here. But you’re betting entirely on capital gains for profit, and those can be hard to predict.
How long will the glut persist? How long will the trade war go on? How much Chinese production will come into the market, and when?
It’s foolish to give a precise prediction, but my guess is that we’re talking months instead of years. An investor in their 40s, with a five-year time horizon, will probably be very happy with a Micron investment made today.
Just keep an eye on it. Prices and market conditions fluctuate.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in JPM.
