On Tuesday, Aug. 13, stocks surged on some helpful trade news. Basically, the U.S. has backed off its threats to impose new tariffs on Chinese imports that were set to go into effect early next month. In gestures of good faith, representatives from both sides will hold talks in a couple of weeks, and the U.S. will avoid levying the new tariffs until mid-December.
“Further, as part of U.S. Trade Representative’s (USTR) public comment and hearing process, it was determined that the tariff should be delayed to December 15 for certain articles,” said the USTR in a statement. “Products in this group include, for example, cell phones, laptop computers, video game consoles, certain toys, computer monitors, and certain items of footwear and clothing.”
After looking at that list of products, I don’t think it’s surprising that a variety of technology stocks responded positively to the news. One of those names was Micron (NASDAQ:MU stock), which surged 4.84% on above-average volume.
As has been widely noted, MU is highly sensitive to tariffs, and there are a slew of diverging opinions on Micron stock out there. Seemingly, for every new bearish call on the maker of NAND and dynamic random access memory (DRAM) chips, another analyst becomes bullish on Micron stock. Being neutral on Micron stock in the near-term may be the appropriate call.
What’s Next for MU
As I mentioned earlier this month, Micron operates in commoditized, price-sensitive corners of the semiconductor market, leaving the company little in the way of pricing power. Simply put, DRAM prices plunged in Q2. That is one very good reason to be careful with MU stock, particularly after Tuesday’s pop.
“According to investigations by DRAMeXchange, a division of TrendForce, quote trends for various products, including commodity DRAM, server DRAM and consumer DRAM, fell by nearly 30%, with the exception of discrete mobile DRAM/ eMCP products, whose declines fell within the 10 -20% range,” said DRAMeXchagne in a recent note. “Server DRAM prices suffered the steepest fall, registering a near-35% decline. Observing the market, we see that although 2Q sales bit grew over the previous quarter, quotes kept on falling, causing total DRAM revenue to fall by 9.1% QoQ in 2Q.”
In addition to those falling sales, which alone are bad enough, Micron and its marquee rivals in the DRAM space are experiencing contracting profit margins.
“An observation of the suppliers’ profitability shows that DRAM suppliers’ operating profit margins all registered declines due to the steep price fall in 2Q. Samsung’s operating profit margin declined the least among the top three (from 48% to 41%), but its DRAM gross margin managed to come in above 50%,” according to DRAMeXchagne. “The fall in quotes during Micron’s fiscal quarter, beginning from March and ending in May, rivals that of Korean suppliers, and thus their operating profit margins fell from 46% last quarter to 35%. Suppliers’ profitability will be squeezed further in 3Q looking forward as quotes continue to descend.”
Whether it’s Micron stock or any other name, investors should always ponder the efficacy of owning shares of a company that’s in an industry with declining revenue AND falling profit margins.
The Bottom Line on Micron Stock
As mentioned earlier, analysts are divided on MU stock. Citigroup’s Christopher Danely recently hit the shares with a “sell” rating and a $30 price target, well below the current MU stock price of around $42. However, Danely said MU stock price could go to $60 over the long-term.
“Since 2001, Micron’s gross and operating margins have consistently put in higher [cyclical] highs and higher [cyclical] lows,” said the analyst.
On Wall Street, being short-term bearish and long-term bullish can be sort of a cop out, but with Micron stock, that may just be the most appropriate way of viewing the name right now. DRAM demand data confirms near-term headwinds exist, but a cyclical trough could occur sometime in the next 18 months or so and that would bode well for MU stock price.
As of this writing, Todd Shriber does not own any of the aforementioned securities.
