For Micron (NASDAQ:MU) stock, the more things change, the more things stay the same. Over the last few weeks, MU traded higher on hopes that the trade war would soon end. Seeing those hopes dashed sent the stock lower. As a result, traders now grapple with mixed signals on what Micron stock will do next.
The bulk of forces indicate a continuing downtrend in MU stock. Traders may have reasons for optimism. However, until those reasons turn into results, I expect Micron to fall in the near term.
I have long stated that MU stock acts as a proxy for memory prices. This remains true. Even with the recent surge, MU has not come close to the $64.66 per share high of June 2018.
However, despite a down market in NAND and DRAM chips, MU stock has seen a good deal of activity. In early July, I told readers to treat a recent surge as a selling opportunity. Admittedly, I made that call early. Micron stock continued to surge another 20% higher on optimism that the trade war truce would hold.
Micron Stock and the Trade War
Re-escalation of the trade war has taken the stock well below its $48.70 per share high from mid-July. It also shows that a secondary cycle has shown up, one related to trade wars. MU stock rises when tensions ease. However, when they heat up again, it sends MU on a downward spiral. How far it falls likely depends on the trade war. This will also hold true even more non-memory chip stock such as Nvidia (NASDAQ:NVDA) and AMD (NASDAQ:AMD).
Furthermore, a new Chinese chip company has begun to emerge. In the recent past, Micron had to only worry about Samsung and SK Hynix, both based in South Korea. Now, Changxin Memory Technologies memory technologies will invest $8 billion in making DRAM chips. This does not make China completely independent. Changxin will still depend on U.S. equipment and suppliers. Nonetheless, it likely means more price pressure going forward.
However, analysts expect pricing pressure for a different reason. Profits for the next fiscal year still point to a sharp decline. Predicted earnings for the current fiscal year stand at $6.22 per share. However, fiscal 2020 profit estimates have fallen to just $2.48 per share. Wall Street had predicted $4.66 per share only 90 days ago.
Also, in the company’s last quarterly report, CEO Sanjay Mehrotra reminded investors that capital expenditures fell in fiscal 2019. He announced that CapEx would continue to decline in fiscal 2020 as the company continues to balance manufacturing investments with their goals for free cash flow.
Reasons for Optimism
Yes, chip prices will continue to remain the dominant force driving MU stock. However, we could see reasons for optimism, even while prices fall and competition increases. As David Moadel mentioned, Goldman Sachs (NYSE:GS) has raised its price target from $40 per share to $56 per share.
Moreover, the surge in the price of bitcoin and other cryptocurrencies contributed to the rise in memory prices in 2017 and 2018. Bitcoin traded below $4,000 as late as late March.
Today, it has surged back to the $12,000 range. This could potentially renew interest in crypto mining. Moreover, artificial intelligence, self-driving cars, 5G, and the Internet of Things have not gone away. The full adoption of these technologies will take time. Still, as more consumers and businesses adopt these products, demand for memory chips will only move higher.
The Bottom Line on Micron Stock
Micron will eventually rise, but supply gluts and geopolitical uncertainty will drive down the price of MU stock in the near term. MU has dropped as the trade war with China again intensified. On this news, the hopeful signs that demand had begun to pick up faded away.
Though chip cycles usually drive the Micron stock price, for now, feelings about when the U.S.-China trade war have moved MU stock. With the trade war heating up, and China beginning to produce memory chips at home, MU will likely fall in the near term.
However, forces coming into play may turn both memory prices and MU stock around. First, crypto prices have again risen to levels that might make crypto mining profitable again. Moreover, the rise of several emerging technologies will bring a permanent demand increase to the industry.
Once these forces begin to drive revenues higher for Micron, investors may then want to buy Micron stock. For now, investors should watch instead of buy.
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.