Micron Technology (NASDAQ:MU), which provides semiconductor systems, has recently had a great run up in price. On June 25, MU stock saw an intra-day low of $32.61. Then, on July 25 it hit $48.70, a high for the year so far.
As earnings season ramps to full speed, high volatility in the broader technology market is likely to be the dominant theme for several more weeks. Micron stock is expected to report in mid-September. However, two of Micron’s competitors, Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA), are set to report earnings on July 30 and Aug. 15, respectively. Therefore, their results are likely to affect semiconductor stocks, including Micron Technology.
Let’s take a look at the catalysts driving this semiconductor firm and what investors may expect from the MU stock price for the rest of the year.
Micron’s Main Product Line
On June 25, Micron released its most recent quarterly statement for the third quarter of fiscal 2019. The company produces computer memory and computer data storage, including dynamic random-access memory (DRAM), NAND flash memory and USB flash drives for different end markets.
In terms of performance by product line, Wall Street analyzes Micron’s results for two main products: DRAM and NAND.
DRAM is used for primary system memory. It is widely found in digital electronics where low-cost and high-capacity memory is required.
NAND flash memory is used for storage. Flash memory is a computer storage medium that can be electrically erased and reprogrammed. NAND forms the core of the removable USB flash drives.
In Q3 2019, 64% of Micron’s revenue came from sales of DRAM while 31% came from NAND flash. The DRAM market is bigger than NAND and has fewer manufacturers, or competition for Micron. Profit margins are also higher in DRAM.
After the end of fiscal 2018, management stopped reporting gross margins. In Q4 FY2018’s earnings report, DRAM gross margin was 71% of revenue while NAND gross margin was 48%. In other words, the DRAM market is at this point more important for Micron stock.
Different End Markets for Micron Stock
Micron reports revenue in four segments, corresponding to the end markets it serves:
- Compute and Networking (CNBU) with about 50% share of revenue
- Mobile (MBU) with about 2% share of revenue
- Storage (SBU) with about 17% share of revenue
- Embedded (EBU) with 11% share of revenue
In short, Micron’s products can be found in data-center servers including the cloud, mobile devices, automotive, industrial, and consumer markets.
Investors who plan to invest in MU stock long term may want to consider the trends in the semiconductor industry. That way, they have a better understanding of growth opportunities as well as threats for Micron stock and the competition.
For example, especially in the first half of the year, many analysts have been concerned about the low memory price. This has a direct effect on Micron’s revenue pie and hence, Micron stock. The other component of revenue is volume. And Wall Street has been discussing excess inventory levels and lower demand in DRAM and NAND for some time now.
The prolonged U.S.-China trade war is also on the minds of investors. That’s because over 55% of Micron’s sales come from China.
Where MU Stock Price Is Now
However, it is not all doom and gloom for MU stock. On June 25, Micron reported earnings that came in better than expected. The next day, the shares gapped up and opened at $35.87. Micron stock has not looked back since then.
Investors have also been anticipating a memory-chip price recovery and a resolution to the U.S.-China trade wars. Of particular importance is Huawei, as about 13% of MU‘s sales are to the Chinese company, which been at the center of trade war issues.
In July came an upgrade which gave MU stock another boost, easily pushing it over $45. Subsequently, shares are up over 49% year-to-date. And most of these gains came during the course of a month, erasing a volatile first half.
Therefore, I am expecting some short-term choppiness and potential profit-taking in Micron stock in the coming weeks, possibly until when it report on Sept. 19.
If you’re an investor who also follows technical analysis, then you should know that shorter-term charts imply that that MU stock is likely to take a breather. Such a potential pullback would enable long-term investors to buy on the dips.
Meanwhile, if you already own Micron stock, you may either consider taking some money off the table during this market bounce or hedging your positions.
As for hedging strategies, covered calls or put spreads with Oct. 18 expiry could be appropriate as straight put purchases are likely to be expensive due to heightened volatility.
A hedged position would give investors breathing space until the markets potentially calm down until the earnings season is finished. Then, they can decide on the best course of action for their portfolios, with less anxiety than an unhedged investor.
The Bottom Line on MU
The semiconductor industry is cyclical. It is never easy to know whether the downside of a given cycle might take longer than previously expected. Also, the current economic and political environment in the U.S. and globally offers plenty of questions.
Despite company-specific fundamentals, the semiconductor stocks are all in the same boat. And what affects one stock is likely to affect its peers, too. Therefore those investors who want to see how the broader index is trending may also want to keep an eye on the iShares PHLX Semiconductor ETF (NASDAQ:SOXX).
If the Federal Reserve decreases interest rates for the rest of 2019, investor sentiment regarding the U.S. economy will likely improve. Then infrastructure and tech spending may also increase, and MU stock is likely to benefit from these economic developments.
Over the long term, I would not bet against Micron stock. In the short-term, though, the share price of the chip company is likely to be choppy. Considering how far shares have gone lately, many investors may decide to wait until the next earnings report.
As of this writing, the author did not hold a position in any of the aforementioned securities.