Investors who calculated that Micron (NASDAQ:MU) stock had bottomed as June began to wind down have been nicely rewarded. Since June 25, MU stock has surged 36%. It was up again on Friday, closing at $44.51 for a 2.37% pop that capped another week of gains and propelled MU stock to a new 2019 high.
The question is whether Micron stock has rallied to the point where it is now overpriced or it still has room to climb further. After all, just a year ago, MU was over $57.
The Huawei Ban Fizzles
One of the big wins for Micron over the past month started as a blow that kneecapped MU stock.
The trade war with China has been a challenge for most U.S. tech stocks, but Micron has particularly high exposure to it, as roughly half of its revenue comes from the Chinese market. And one Chinese company — Huawei — accounted for a whopping 17% of MU’s revenue in the first half of 2019. When the U.S. government announced a ban on May 15 that prevented American technology companies from selling components to Huawei, the fallout was immediate for Micron. MU stock tanked at the prospect of such a big chunk of its revenue simply evaporating.
However, that dire scenario didn’t last. At the G20 Summit in June. President Trump announced that U.S. companies would be allowed to continue selling products to Huawei. Since that reprieve, Micron stock, which had been in the doldrums, has made a comeback.
In the final week of May and through June, as pessimism among investors set in, MU was frequently trading for under $33. The reversal of the Huawei ban set the stage for a three-week run that continued on Friday and now has MU stock at its highest level in 2019. Also helping the rally was MU’s better-than-expected third-quarter earnings report on June 25. Micron’s revenue was down nearly 39% year-over-year, but its revenue and earnings handily beat analysts’ average expectations.
Higher DRAM Prices Could Further Boost MU Stock
Micron’s primary source of revenue is DRAM memory chips, and its second-largest business is NAND memory chips. Demand for memory used in computers, smartphones and other devices — in the form of DRAM and NAND — is cyclical, as the owners of MU stock have discovered. The price of DRAM went through the roof for several years, starting in 2016, before dropping in 2019. Analysts, on average, have called for DRAM prices to decline by up to 25% in all of 2019. Hit by a combination of increased manufacturing capacity and declining smartphone sales, NAND prices have also been dropping.
Micron stock has been heavily impacted by these price declines. As demand for DRAM and NAND rose from 2016 to 2018, resulting in higher prices, MU stock went from under $10 in early 2016 to over $61, its highest level in two decades, at the peak of the market in the spring of 2018.
As last week wound down, DRAM prices unexpectedly spiked. DRAM prices rose for several consecutive days, jumping 4.72% during the period, according to DRAMeXchange, which tracks the worldwide DRAM spot market.
The price hike was triggered by a trade dispute between Japan and South Korea that escalated last week, impacting exports from South Korean technology companies. And it just so happens that two out of the three largest producers of DRAM — Samsung and SK Hynix — are based in South Korea. The ripple effect of the trade dispute has affected the global supply of DRAM, causing prices to go up. That’s unexpected good news for Micron.
With neither country backing down, the restrictions on DRAM exports could be prolonged. A continued recovery of DRAM prices would certainly boost MU stock.
So can Micron stock continue to climb this year? After the rescinding of the Huawei ban and the inception of the trade dispute between South Korea and Japan, MU’s revenue outlook is better than expected. If both trends continue, these factors alone – and the boost in revenue they provide – should enable MU stock to climb meaningfully.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
