Treat the Recent Surge in Micron Stock as a Selling Opportunity

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Micron (NASDAQ:MU), like other chip stocks, surged in Monday trading following the truce in the trade dispute. The Boise-based memory chipmaker has spiked higher over the last few trading sessions as the expected bad news on Micron stock became less negative than anticipated.

Treat the Recent Surge in Micron Stock as a Selling Opportunity

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Nonetheless, this news does not change the fact that Micron remains a cyclical stock in the middle of a down cycle. Until the chip market sees improving demand, Micron will resume and continue its trend downward.

Micron Stock Catalysts

MU stock surged ahead by almost 4% as the Trump Administration agreed to suspend further hikes in tariffs on China following the President’s meeting with Chinese President Jinping. The chip sector reacted favorably, with Broadcom (NASDAQ:AVGO) rising by 4.3% and both Qualcomm (NASDAQ:QCOM) and Nvidia (NASDAQ:NVDA) both increasing by more than 1%. Semis received further help as President Trump eased restrictions on selling to Huawei.

On the surface, one can easily understand why MU stock surged so much. Few other American companies depend more on China than does Micron. Currently, Micron’s revenue exposure to China stands at 66%, according to Goldman Sachs (NYSE:GS). At least for now, this truce brings Micron less uncertainty.

Micron stock has also moved ahead since announcing earnings on June 25. The company beat lowered estimates on both revenue and profits. This took MU higher by almost 22.75% over the course of four trading sessions.

Micron Profits, Expenditures Dropping

Unfortunately for MU stock bulls, Micron remains the same company that has traded on memory chip cycles for as long as anyone can remember. Every indication shows the cycle moving down. Last quarter’s earnings of $1.05 per share beat estimates by 27 cents per share. However, the company earned $3.15 in the same quarter the previous year. Likewise, revenues of $4.79 billion dropped by 38.6% year-over-year.

Our own Ian Bezek believes that people who buy MU stock after these earnings reports will be disappointed. I agree. Bezek also took this quote from Micron CEO Sanjay Mehrotra that tells traders everything they need to know about the short-term future of Micron stock.

“Micron’s improved competitive position and strong execution helped us deliver solid results despite a challenging environment. While we are seeing early signs of demand improvement, we plan to reduce our capital expenditures in fiscal 2020 to help improve industry supply-demand balance.”

Micron Is a Memory Price Proxy

In many previous articles, I called MU stock a proxy for memory prices. Reduced expenditures indicate both revenue and profits will continue to fall. Analysts also outline this in their earnings forecasts. These predictions have gradually decreased over the last 90 days.

However, over the previous seven days, earnings estimates for fiscal 2020 fell from $4.27 per share to just $2.68 per share. About 25 years of history tells traders that MU tends to drop when earnings decline so dramatically.

Amid this slide, I see one bit of good news for MU bulls. In past down cycles, Micron lost money, taking MU stock below $10 per share. While current forecasts called for deeply-reduced profits, analysts expect the company to remain profitable. I see MU stock at least retesting the $28.39 per share low of last December.

However, I do not predict a return to single-digit price levels. Nonetheless, cycles remain, and traders should get out of MU sooner rather than later.

Concluding Thoughts on Micron Stock

The earnings and trade news will not reverse the downtrend in MU stock. MU has seen an impressive run as an earnings beat, and a trade truce helped to take Micron almost 23% higher in less than a week.

Unfortunately for MU stock bulls, the decades-long pattern of trading on memory prices remains in place. The earnings beat does not change the fact that year-over-year profits fell by two-thirds. Moreover, with the company reducing capital expenditures, profits will probably continue to fall. These lowered earnings will inevitably bring a lower stock price.

Despite my negative outlook, I would advise traders to still watch MU stock. Innovations in self-driving cars, artificial intelligence, and virtual reality will lead to a permanent demand increase in memory chip prices. Micron is one of only three companies in the world making the needed memory chips.

Once this technology sees more widespread adoption, this should bring another up cycle to Micron. However, until we see that demand coming, I would advise against holding any long position in MU stock.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.


Article printed from InvestorPlace Media, https://investorplace.com/2019/07/recent-surge-micron-stock-selling/.

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