The long-awaited Micron (NASDAQ:MU) recovery appears to have finally arrived. Micron stock and profits took a beating last year because of a combination of the decline in crypto and an emerging trade war.
However, new technology has begun to drive what looks like a permanent demand increase in memory chips.
Moreover, both management sentiment and analyst estimates have shown beginning signs of a recovery. MU stock has recovered as a result. With this uptick, the question becomes when to buy Micron stock, not whether to buy.
Micron Will Head Higher
All of us make bad decisions on stocks from time to time. Unfortunately, my wrong call caused me to miss the uptick in MU stock.
Three days after saying that the trade war would keep MU “suppressed in the short term,” the company released a report that blew my short-term investment thesis out of the water.
Management gave a presentation at a technology investment forum on Aug. 12. There, they announced that while inventories remained high, cloud and graphics have meaningfully increased demand for memory chips.
This news became the catalyst that took the Micron stock price from the low-$40s per share range to over $50 per share today. I have described MU stock as a different breed from chip stocks such as Intel (NASDAQ:INTC), AMD (NASDAQ:AMD), or Qualcomm (NASDAQ:QCOM). MU stock remains a proxy for memory prices, and the recent uptick again shows that.
MU Stock and Long-Term Prospects
Admittedly, even as the stock fell from the low-$60s per share range to below $30 per share, the long-term outlook has remained strong. Artificial intelligence (AI), self-driving cars, the Internet of Things (IoT), and 5G will drive a permanent increase in demand for memory chips.
Moreover, bitcoin again sells for over $10,000. The decline of crypto played a significant role in the falling demand for memory. Hence, it stands to reason that a price recovery should lead to at least a partial revival in demand for memory as crypto mining again becomes more economical.
Furthermore, valuations remain reasonable. MU currently supports a forward price-to-earnings (PE) ratio of 19.8 and a trailing PE of around 5.9. Granted, with the rock-bottom PE ratio Micron has supported, the forward PE may appear pricey. The average PE ratio over the last five years has stood at only about 12.8.
However, over the last month, Micron received something it had not seen in some time—rising earnings estimates. After falling for more than a year, earnings estimates for this year now stands at $6.23 per share. For fiscal 2020, they have risen to $2.56 per share. I expect the 2020 forecast will keep rising if the demand estimates hold.
Watch out for the Short Term
Hence, I expect MU stock will keep moving higher from here over time. The question becomes what it will do in the short term. I made my wrong call early last month at around $41 per share.
Now that MU has moved past $50, it has seen an increase of more than 20% in just over a month. I do not think it will return to the low $40s per share range anytime soon. However, this relatively quick rise could bring some profit-taking and a partial pullback.
Moreover, investors should note that trade talks have resumed. Negotiations do not constitute an agreement. Admittedly, they could lead to one at any time. In that case, I think MU stock spikes higher from here.
However, we have been on the cusp of an agreement more than once only to see negotiations fall apart. This sent MU and other stocks down before. It would likely do so again. I see such an action as the ideal time to buy Micron stock.
The Bottom Line on Micron Stock
Rising demand has helped to revive MU stock. Now, investors need to know when to buy. A management presentation pointing to increasing demand began a surge in MU that would take the equity more than 20% higher over the next month. Analyst revisions and better prospects for a trade deal almost helped Micron.
However, the surge in MU stock could lead to some profit-taking. Also, it remains possible that trade talks will deteriorate. For these reasons, Micron stock could face a short-term pullback.
Still, even if sentiment turns bearish for a time, the long-term prospects for MU stock have begun to bear fruit. This should only accelerate as consumers start to buy 5G-compatible smartphones.
Investors who want to protect themselves from a short-term pullback should either buy in slowly or wait. However, the recovery in the chip sector has begun in earnest. This by itself makes MU stock a buy, if not now, then soon.
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.
