Can the Rally of Micron Stock Last?

The stock price of Micron (NASDAQ:MU) is prone to sudden explosive moves. Just look at the past month. During this period, Micron stock swung from $35.20 to its current price of close to $40.50.

Can the Rally of Micron Stock Last?

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The main reason for this, of course, is the lessening of tension between the U.S. and China on trade.  There was, for example, a truce on tariffs as well as a backing off on the severe restrictions on Huawei, which is a huge buyer of U.S. technology. All this sparked a rally in the chip sector, boosting stocks of companies like Qualcomm (NASDAQ:QCOM) and Intel (NASDAQ:INTC).

But for MU stock, the thawing of the trade war was particularly important. Keep in mind that a majority of its sales come from China.

Yet MU’s quarterly announcement also boosted MU stock. Its earnings per share came in at $1.05, which beat analysts’ average estimate by 27 cents. MU’s top line beat expectations by about $100 million.

So all in all, the bull move of MU stock is based on encouraging fundamentals. But the big question is: Can the rally of Micron stock continue?

Well, I’d be cautious on MU.  First of all, it’s important to note that – before the strong move of MU stock – sentiment towards MU was downright awful. In other words, any kind of good news would have likely sparked an acceleration of buying.

Next, after drilling down further on the earnings report,  it’s clear that MU still has some nagging issues.  During the quarter, its profit fell about 67% from the same period last year. There was also a grueling 38.6% plunge in its revenues to $4.79 billion.

Unfortunately, it looks like these large declines will not be temporary. For the fiscal fourth quarter, MU expects its revenues to range from $4.3 billion to $4.7 billion, while the average estimate was for $4.9 billion. As for earnings per share, the company’s estimate is for 38 cents to 52 cents a share.  Analysts, on average, had forecast a more robust 78 cents.

But that should not be a surprise. Europe and Asia are reporting decelerating growth. In fact,  World Semiconductor Trade Statistics is projecting a 12% drop in chip sales across the globe this year.

No doubt, the boom-bust cycle has been an essential part of the industry. But during the past few years, there has been talk that somehow this would no longer be the case because of non-cycical trends in categories like smartphones, IoT (Internet-of-Things), robotics, AR (Augmented Reality) and AI (Artificial Intelligence). But, as shown by the steep drop of MU’s revenues, this notion looks far from realistic. Last quarter, there was weakness across all the major parts of the company’s business.

Interestingly enough, the latest M&A moves from Broadcom (NASDAQ:AVGO) also seems to invalidate the theory that the semiconductor sector has become non-cyclical. Last year, the company acquired software developer CA, and there’s buzz that it will acquire Symantec (NASDAQ:SYMC). Does this aggressive effort to diversify signal that AVGO believes that the chip industry is headed for problems?

The Bottom Line on MU Stock

It would probably be a stretch to say that MU stock is headed for a big drop. Its cash flows remain high and it will probably continue to buy back Micron stock. The valuation of MU stock, which has a forward price-earnings ratio of eight or so, is also reasonable.

Yet for now, it’s probably best to hold off on buying Micron stock. It could get tougher for MU to churn out gains as its growth profile looks dicey.

Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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