The 3 Big Reasons to Believe in the Micron Stock Turnaround

Micron stock could be in the first few innings of a huge reversal

Shares of memory chip giant Micron (NASDAQ:MU) were under tremendous pressure for most of 2018 and into early 2019, as the supply-demand fundamentals in the company’s core DRAM and NAND markets notably deteriorated. Micron stock didn’t do any better.

The 3 Big Reasons to Believe in the Micron Stock Turnaround
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That is, demand slowed at the same time that supply levels were near all-time highs, thereby creating an adverse “low demand, high supply” backdrop which weighed of memory chip pricing and caused Micron’s revenues, margins, and profits to collapse.

MU stock collapsed, too. From early 2018 to mid-2019, Micron stock lost about half of its value.

But, over the past three months, MU stock has shown considerable signs of strength. During that stretch, MU stock has rallied nearly 50% to its highest level in a year.

Is this rally warranted? Is it the beginning of a meaningful recovery in Micron stock? Or it it just head-fake in a bigger picture downtrend?

I think it’s the former. For three big reasons. Those three big reasons to believe in the MU stock turnaround are as follows.

1. The Macro Backdrop Is Improving

First, and foremost, the macro backdrop supporting MU stock is materially improving and implies both that the fundamentals are getting better today, and should continue to improve for the foreseeable future.

There are two things here. First, the trade war. The trade war hasn’t had a huge direct impact on the global economy yet. But, it has had a huge indirect impact by creating business uncertainty all across the globe. This uncertainty has weighed on corporate spend, and as corporate spend has dropped, big semiconductor customers have pulled back on their big orders.

This should all reverse course soon. Trade tensions are easing now. They should continue to ease for the foreseeable future because neither side wants to escalate this war much further. China’s economy is stumbling, and the government wants its economy to find its footing before they re-up the ante in the trade war.

At the same time, the U.S. economy is showing signs of slowing, too, and U.S. President Donald Trump doesn’t want the economy to slow much more heading into an election year. Consequently, trade tensions should ease going forward, providing an upward lift on global business confidence, which should, in turn, bring demand back into the memory chip market.

Second, global growth. As the trade war has escalated, global growth has slowed. But, with trade tensions easing and central banks globally reducing rates, the global economy appears to be in the last few innings of this slowdown.

Just look at OECD’s leading indicator data, which shows that year-over-year declines in the global economy’s leading indicator index have moderated in each of the past four months. Or, look at the Citi Economic Surprise index, which has peaked into positive territory for the first time this year.

Broadly, then, the trade war is cooling off and global growth is bottoming, implying that demand should come back into the DRAM and NAND markets in a big way over the next few quarters.

2. Analysts Are Growing More Bullish on Micron Stock

The second big reason to believe in the MU stock turnaround is that a lot of well-equipped, highly-trained, and very-informed analysts believe in it, too.

Over the past two months or so, a wave of Wall Street analysts have publicly said that the fundamentals in the memory chip market either already are or are very close to improving. Specifically, Mizuho said that their supply chain checks suggested improving NAND pricing trends and stabilizing DRAM pricing trends.

Deutsche Bank said recently that current DRAM pricing action suggest that prices are bottoming out. Goldman Sachs recently said that the memory market is broadly stabilizing and that DRAM and NAND margins should bottom relatively soon. Needham has said that Micron’s EPS appears to be bottoming out.

All in all, Wall Street analysts are finally buying into the MU stock rebound thesis. That’s why – for the first time in over a year – the consensus price target on MU stock has actually inched higher over the past two months. Historically speaking, such “inching” higher in the sell-side price target following a multi-month stretch of price target cuts is significant of a bottom in MU stock.

3. The Timeline Makes Sense

The third big reason to believe in the MU stock turnaround is that the timeline for a broad semiconductor rebound lines up with historical data.

That is, the global semiconductor market has compressed four times over the past twenty years. Each time, the compression lasted for about 12 to 16 months. We are now 10 months into this current compression.

Thus, history says that within the next 2 to 6 months, the semiconductor market should bounce back. As it does bounce back, so should Micron stock.

Bottom Line on Micron Stock

As go the DRAM and NAND markets, so goes MU stock. That is, when the pricing environment in the DRAM and NAND markets is favorable, MU stock goes higher. When the pricing environment is unfavorable, MU stock goes lower.

For the past 18 months, the pricing environment has been unfavorable, characterized by falling demand against the backdrop of sky-high inventory levels. But, signs are starting to emerge that demand is coming back, while inventory levels are topping out.

Thus, the memory market’s pricing environment should improve for the foreseeable future, and that improvement should send MU stock higher.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/3-reasons-micron-stock-turnaround/.

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