Currently, two points of interest surround Micron Technology (NASDAQ:MU). First, Micron is scheduled to release its fiscal fourth quarter of 2019 earnings report. Recently, Goldman Sachs generated headlines when analysts there declared that MU stock could rise through Micron beating expectations. For the record, consensus estimates peg earnings per share to come in at 48 cents.
Second and more significantly, both political and economic observers are hoping for a truce in the U.S.-China trade war. While the tit-for-tat tariffs have combined with aggressive nationalistic rhetoric, I see a case for at least some resolution. Although I’ve generally been pessimistic about this conflict, both sides are incentivized to come to the negotiating table. Even a modest truce could spike Micron stock.
Of course, such a geopolitical development would be much more meaningful for MU stock than an earnings beat. While I respect Goldman Sachs’ confidence, it’s not completely out of the question for MU to bring home the goods. In Q4 of the last fiscal year, Micron produced an EPS of $3.53.
The wide gap year-over-year is due to the volatile memory chip market. Before the trade war, robust demand for emerging, lucrative technologies such as the cloud and data centers lifted chip prices. Naturally, semiconductors ramped up production. But when the trade war prolonged beyond what many experts forecasted, it created production pressures. This eventually caused a supply glut, gutting Micron stock due to declining memory chip demand.
But prices are picking back up again, which explains the surge in MU stock since late June. What would really seal the deal, though, is a trade agreement.
For MU Stock Investors, All Eyes Are on the Trade War
Over the next two days, U.S. and Chinese deputy trade negotiators will engage in face-to-face meetings in Washington. This is the first such meeting in nearly two months. Moreover, organizers hope that this will lay the foundation for high-level talks early next month.
While an insider suggested that the current meetings will focus on agriculture, they nevertheless have longer-term implications for Micron stock. That’s because the trade war can’t end without the two sides hashing out an agreement. Thus, these lower-level talks provide an ideal segue.
As I pointed out earlier, I haven’t been too hot on a deal materializing soon. Yet some news items suggest we may be getting closer. For example, President Donald Trump proclaimed his own “gesture of goodwill,” delaying for two weeks a scheduled 5% lift in tariffs. According to the president, that was to allow China to celebrate their republic’s 70th anniversary with one less stressor.
More importantly, both sides have hurt significantly from the conflict. In China, growth has grinded down to its slowest rate in decades. Although the trade war isn’t the only contributing factor, it plays a major role. Additionally, this slowdown isn’t just a granular, esoteric concept: rising wages in China means that Chinese manufacturers may look overseas themselves for cheap labor, hurting the growing middle class.
Here in the U.S., Trump may boast about winning this trade war. But the facts suggest a different narrative. For instance, courier service FedEx (NYSE:FDX) complained that the geopolitical dispute has impeded its business.
Furthermore, the trade war is hitting home to areas such as the American lobster industry, which has seen disastrous declines. That puts serious pressure on the Trump administration because of the election cycle. By logical deduction, this benefits the bullish narrative for MU stock.
What Happens If Talks Fail?
While indications suggest that we may have some truce, we won’t know until we know. Unfortunately, the current administration has a knack for pulling surprises on us out of the left field. Thus, no substantive truce is also a very real possibility.
Seemingly, that bodes poorly for Micron stock. As you know, American semiconductor companies’ revenue streams are heavily dependent on overseas demand. Moreover, a failed negotiation could panic Wall Street, tanking cyclical names like MU stock.
That said, we can’t ignore that Trump’s aggressive prosecution of this trade war represents a net long-term tailwind for Micron. Bear in mind that our tech firms are locked in both capitalistic and national security interests. In fact, Micron themselves lists China’s “national policy objectives” as a risk factor for MU stock.
Plus, Micron themselves have been victims of Chinese corporate espionage. So as painful as this trade war is, it’s also in many ways necessary.
Of course, not getting a deal may severely impact Micron stock due to panicked sentiment. But if you have a long-term outlook, that volatility would present a discounted opportunity for you. With so much at stake, none of our tech players are letting their foot off the gas.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.