Micron Technology (NASDAQ:MU) is roughly a $50 billion company, meaning the maker of memory chips is a fraction of the size of giant semiconductor stocks, such as Intel (NASDAQ:INTC) and NVIDIA (NASDAQ:NVDA). Still, Micron stock has its own advantages.
Micron is widely considered a semiconductor bellwether since MU is a highly cyclical name in a highly cyclical market segment.
As of July 31, Micron was up more than 41% year-to-date, an advantage of nearly 800 basis points over the widely followed PHLX Semiconductor Index. However, Micron’s bullishness this year may actually be adding to the near-term bear thesis on the shares.
A Closer Look at Micron Stock
Micron is a leader in the production of dynamic random-access memory, or DRAM, chips as well as NAND semiconductors. DRAM chips are integral components in personal computers while NAND chips are used to produce smartphones, among other tech gadgets.
On multiple fronts, Micron is sensitive to semiconductor demand trends and those trends are appearing tepid for 2019.
The World Semiconductor Trade Statistics recently said it expects global chip demand will decline 12.1% this year. That’s a bigger drop than was seen right after the global financial crisis, and yes, some of the declining demand is attributable to memory chips.
“Demand has plunged for memory chips used in data centers, smartphones and elsewhere. Memory sales, which account for roughly 30% of the semiconductor market, are seen tumbling 30.6% to $109.5 billion in 2019.” according to the Nikkei Asian Review.
Resilience and MU Stock
That report was issued in early June and Micron has been mostly resilient since then. What many technology stocks, chip names, in particular, are not impervious to is the ongoing trade spat with China. Micron’s price action on Thursday, Aug. 1 proved as much. However, another trade war, the one between Japan and South Korea, could actually benefit Micron.
“Media reports have said Japan may limit some chemical exports to Korean companies that need the supplies to make memory chips. Yet the chip makers probably have a couple month’s worth of chemicals inventory,” reports Barron’s, citing Morgan Stanley.
That is a void Micron can exploit, but the markets the company operates in are highly competitive with prices that have historically trended lower over the long-term.
“This ultimately leads to major price competition between industry leader Samsung and second-tier firms such as Micron and Hynix,” said Morningstar. “The latter competitors generally establish joint ventures, such as IM Flash Technologies, in an attempt to come up with superior memory solutions.”
Due to the fractured nature of the markets in which the company operates, Micron is not a growth stock as many investors might expect. The shares trade at less than 15x forward earnings, but there are some areas where Micron is growing, potentially making the stock attractive for investors that can stomach the boom/bust nature of the chip business.
Last year, Micron had a return on equity (ROE) of 55.52%, or more than double that of the PHLX Semiconductor Index while company’s return on invested capital (ROIC) was nearly triple that of the benchmark and those numbers for Micron have been trending higher over the past several years.
Bottom Line on Micron Stock
Micron isn’t stretched on valuation and as noted above, its operating metrics are robust. Given the impressive rally by shares this year, trade-related headwinds and demand issues, the low to mid-$40 range is probably appropriate for MU and that is where the shares currently reside.
At a time when trade issues could come to the forefront of investors’ minds, the best way to play Micron stock for a short-term, swing trade. From the long side maybe wait for it to come back to the $38-$39 range.
Todd Shriber doesn’t own any of the aforementioned securities.