The Bull Case Looks Dicey for Micron Stock

The U.S.-China trade war and the global slowdown could take a big toll on MU stock

Despite the uncertainty with U.S.-China relations and volatility in global markets, Micron (NASDAQ:MU) stock has been fairly resilient. Keep in mind that the return for this year is about 33%. By comparison, the shares of Intel (NASDAQ:INTC) are flat for 2019 and Broadcom (NASDAQ:AVGO) is up about 10%.

The Bull Case Looks Dicey for Micron Stock
Source: Charles Knowles /

There are certainly important factors that explain the overall strength in MU stock. For example, the third-quarter report showed that the company knows how to skillfully manage Wall Street expectations, as it beat on both the top and bottom lines. It helps that MU is a highly efficient organization and remains committed to investing wisely in its research and development.

There are also powerful secular trends that continue to fuel demand for memory chips. These include artificial intelligence, the internet of things, virtual reality, augmented reality and yes, 5G.

In fact, some investors believe that because of this MU stock is not as cyclical anymore. If so, this would definitely be great news. And the shares actually should have a much higher valuation.

So does this mean there is an all-clear to buy MU stock? Well, not necessarily. Note that there remain several countervailing trends that are weighing on the company. The most obvious is the U.S.-China trade war. Note that about 55% of overall sales for MU come from China (this is for fiscal 2018). So even a small change could have a big impact on the company.

Another issue is that about 13% of its revenues come from China’s Huawei. This company has become a punching bag for President Donald Trump’s administration. Recent headlines include the arrest of the founder’s daughter in Canada for her alleged violations of sanctions. There is some buzz that Huawei may even collapse.

Granted, this may be a worst-case scenario. Yet MU’s heavy reliance on the company’s sales is a big risk factor.

Long-Term Impact From the Trade War

Perhaps the U.S. and China will somehow come to an agreement (although, given the deep issues and mistrust, this does look unlikely in the near term). But this may not matter too much. The reason is that going forward there is likely to be a realignment of the global supply chain. In other words, companies will look for alternatives to companies like MU, say rivals such as Samsung (OTCMKTS:SSNLF) or SK Hynix.

In the meantime, China is investing heavily in its domestic chip sector so as to lesson its dependence on U.S. suppliers. Take a look at Changxin Memory. The company plans to invest a hefty $8 billion in developing its dynamic random-access memory infrastructure.

All in all, there could be long-term damage to MU as it will be increasingly shut out of the valuable Chinese market.

The Bottom Line On MU Stock

The swirling issues regarding trade policies appear to be taking a toll on the global economy. China has been slowing down and it looks like Germany is entering a recession. And yes, there are signs that the U.S. is not immune either, as sectors like real estate and manufacturing have come under pressure. Given all this, it seems reasonable that there will be a reduction in demand for memory chips.

To get a sense of what this may mean for MU stock, consider what happened between 2013-2016. The stock plunged $35 to below $10 as the market for memory chips softened.

Yet this time around, things may be worse as the level of uncertainty is elevated because of the trade war. So even though MU does have a solid balance sheet and a strong market position, it may not be enough in the months ahead.

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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