More than once this year, I’ve cautioned investors about the pitfalls of trading Micron Technology (NASDAQ:MU). Though the memory chip glut was sure to come to an end as the past couple of them did, MU stock was apt to remain plagued by doubts, even against a backdrop of decidedly bullish news, I wrote.
I’m finally shifting gears now. Though I’m still concerned about near-term ebbs and flows that could prove unsettling to new investors, it’s arguable that Micron stock has mostly shrugged off what ailed it and has entered a new paradigm.
And it’s not just a feeling, nor is it an idea solely inspired by Goldman Sachs’ recent (and significant) upgrade of Micron stock.
Micron Stock, Other Chip Stocks Upgraded
Goldman announced a sweeping wave of upgrades that included MU’s rival Western Digital (NASDAQ:WDC), along with technology sector peers Applied Materials (NASDAQ:AMAT), Lam Research (NASDAQ:LRCX) and KLA (NASDAQ:KLAC). Goldman Sachs analyst Mark Delaney explained:
“We are now more positive on global memory stocks as we believe that the excess inventory memory companies are carrying will be depleted faster than our previous expectations, primarily in NAND flash as a result of the Toshiba Memory Corporation (TMC) fab outage that has disrupted a mid single digit percent of annual industry production (and to a lesser extent incremental capex/utilization cuts).”
The industry’s underpinnings, Delaney believes, have set the stage for higher NAND prices through the third quarter. The same tide is proving beneficial to names outside the memory market too, added Goldman analyst Toshiya Hari.
Micron is being viewed as a standout, though. Delaney pointed to shrinking inventory levels and an accelerated depletion of inventories, stating “We believe that Micron is the best stock to express our view.”
Arguably most important to current and would-be owners of MU stock, Delany notes, “…we believe that Micron’s stock will trade more on memory pricing trends and intermediate term EPS expectations than FY20 earnings.”
If he’s right — and he likely is — the uptrend that took shape beginning in late June could indeed be the rekindled rebound effort by MU stock that first started to materialize early this year.
Memory Prices Are Already Rising
In general, analysts have the clout and funding needed to acquire (or aggregate) data the average investor can’t. Goldman Sachs based its upgrade on data it was able to ferret out from within the memory and chip market.
Subtle signs of the memory market’s turnaround were already starting to materialize, though.
One of those signs was a slight rebound in DRAM prices following a multi-month decline from the peak pricing seen in early 2018. Sixteen gigabytes worth of DDR4-2400 DRAM memory chips, for instance, sold for a little over $200 in February of 2018, but fell to around $90 early this month. Now it’s back above $100.
That is not a game-changing price increase, but it is the biggest upward move in DRAM prices in nearly two years.
Click to Enlarge
NAND pricing, which Delaney specifically mentioned, is also already on the mend. A 512-gigabyte solid state drive from Intel (NASDAQ:INTC), priced at nearly $200 in September of 2017, fell to a low price of $77 in April of this year but has since snapped back to $88.
Click to Enlarge
As was the case with DRAM, that was the best, steadiest price increases of NAND, also known as “flash” memory, in more than a couple of years.
That’s only anecdotal evidence, but it’s in-line with data that Goldman Sachs’ Micron analysts also identified.
The Bottom Line on MU Stock
The data, and the relative lack of commentary on it, underscores something I’ve explained several times over the course of the last year. That is, most investors won’t see the end of the memory glut taking shape until well after it’s arrived. And even then, the early part of that rebound will be mistrusted.
That was certainly the case in 2013 and then again in 2016, when similar gluts came to an end. When they started fading, nobody noticed until months later. As was the case in 2013 and 2016, though, the rebound of MU stock earlier this year indicated that the glut was already abating. Anyone who doesn’t think the same phenomenon is happening again now is naive.
There’s no guarantee that Micron stock will only rise from now on. The odds are good, in fact, that MU will retreat at some point as profit-takers seek to lock in their July gains.
Investors would be wise to buy MU stock on any healthy dip, however, even if it feels a bit uncomfortable to do so. The memory market’s recent dynamics are awfully familiar.
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.
