Since I called Micron (NASDAQ:MU) “cheap” late in June Micron stock is up 33%.
At the time Micron traded at a price to earnings multiple of 3, although whether those earnings would remain was open to question. On June 25 Micron delivered a good quarterly earnings report, and people started buying.
Earnings of $840 million, or 74 cents per share, on revenue of $4.79 billion were well below last year’s $3.82 in earnings, $3.10 per share, on $7.8 billion in revenue. But the numbers were well ahead of analyst expectations. Even better was CEO Sanjay Mehrotra’s statement on the conference call that demand was seeing “early signs of improvement.”
Analysts didn’t stay for the rest of the sentence. Mehrotra also said Micron will reduce its capital spending in the new fiscal year.
The Memory Cycle and Micron Stock
Memory is very much a commodity in today’s computing market and Micron, being an American “pure play” in memory, is always volatile.
But it’s important to note that Micron doesn’t have the memory market to itself. Micron had 23% of the DRAM chip market in the first quarter of 2019, placing it third behind Samsung Electronics (OTCMKTS:SSNLF) and SK Hynix (OTCMKTS:HXSCL). Those companies could grab market share while Micron slows its roll. Intel (NASDAQ:INTC), which ended its joint venture with Micron recently, is also still around.
Meanwhile, the chip glut rolls on and an explosion in Chinese fabrication plant investment means the glut could go on indefinitely. Whether the glut is “v” shaped, a sharp downturn followed by an equally sharp rise, or more “u” shaped, a semi-permanent downturn, is still up for debate.
Meanwhile, Micron’s own shrinking inventories, the fruit of slower production, has Goldman Sachs (NYSE:GS) upgrading the stock. Analyst Mark Delaney believes the February quarter was the bottom for Micron, and that it’s better for investors to get in a little too early than too late.
New Metrics for Micron Stock
Micron’s valuation metrics are based on its last four quarters. Before laying money on the table, investors should evaluate the risk-reward based on the current environment.
The worst-case scenario, that the May results are a new normal, means Micron’s market cap of $51.3 billion is over 2.5 times its annual revenue, and 15 times earnings. That’s still below the market, especially for a tech stock, but nothing like the 5.46 price to earnings multiple being quoted as trading began June 23.
While Goldman is forecasting a quick return to prosperity for Micron, semiconductor forecasts are reliably unreliable. IC Insights, for instance, now sees manufacturers using fewer, cheaper chips in each device they make. It forecasts total sales will drop to $444 billion this year from last year’s $500 billion, a fall of 12%, with DRAM prices down a whopping 42%.
Chips will represent just 24.6% of the average price of computers and other devices this year, the report says. Last year it was 31%. The industry won’t likely hit the highs again until 2023.
Again, chip forecasts are notoriously inaccurate. Analysts didn’t foresee the sharp rise in demand through 2018, and they didn’t see how bad the turn would be this year.
The Bottom Line on Micron Stock
There are two kinds of buyers for Micron stock right now.
These are speculative traders, who can profit off rapid price movements and use options to minimize their risk, and longer-term investors who can let their money sit for years and watch time work its magic for them.
Older investors with shorter time horizons or a need for income should stay away from this non-dividend payer.
Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.