Looks like This Momentum in Micron Stock Is for Real

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Micron Technology (NASDAQ:MU) has been struggling in the face of both cyclical and macro factors related to the trade war, but it looks as if Micron stock has a little gas left in the tank after all.

Why Does Micron Stock Have Analysts Falling in Love All Over Again?

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U.S.-China trade headlines have been muted if not positive in recent weeks and that has been to the benefit semiconductor stocks, one of the most trade-sensitive groups. Just this month, the widely followed PHLX Semiconductor Index is higher by 6.21%, but some of its components are doing even better than that.

Micron stock is up nearly 13% this month, as of Thursday, Sept. 19. In fact, the maker of dynamic random-access memory, or DRAM, chips as well as NAND semiconductors, Suddenly has analysts fawning all over it.

On Sept. 18, Goldman Sachs analyst Mark Delaney reiterated a “buy” rating on Micron, noting that the company is likely to beat Wall Street estimates when it reports fiscal fourth-quarter results.

The analyst said, “fundamentals [are] picking up but some headwinds remain,” and that he expects the company’s results and guidance will be slightly above Street consensus.

Delaney bumped his price target on Micron stock to $59 from $56, implying significant upside from the Sept. 19 close just under $50.

All About Demand

As has been previously noted, semiconductor demand is highly cyclical and that is particularly true of the DRAM and NAND markets, Micron’s bread and butter.

Micron usually does a better-than-adequate job of reflecting demand trends in those chip markets, which is to say if demand for those chips slumps, Micron stock does the same.

Samsung, which controls 47% of the DRAM market compared to Micron’s 22%, said it expects demand to pick up going into the fourth quarter, but that overhangs such as the US/China trade spat as well as the trade war between Japan and South Korea could crimp demand.

Assuming DRAM demand is tepid at best, the other catalyst for Micron stock is that prices in this space have, at least for now, stopped declining.

According to Business Korea:

“Market research firm DRAMeXchange reported on Aug. 30 that the average price of 8 Gb DDR4 DRAM chips, which are used mainly in PCs, was US$2.94 that day, showing no change from the previous month…The price slightly rose in December last year and fell for seven months in a row from January to July this year. During the same period, the price dropped no less than 59.4 percent, led by an inventory glut and a sluggish demand attributable to the ongoing economic recession.”

Another positive for Micron is that DRAM inventories are being worked through and some analysts believe that excess supply is close to being fully depleted.

“We are turning more positive on memory fundamentals as we now believe excess inventory will be depleted faster than expected, triggering an improvement in pricing and margin ahead of current expectations,” said Longbow Research analyst Nikolay Todorov in a recent note.

Bottom Line on Micron Stock

At 16.29x forward earnings, Micron stock trades at a modest discount to the PHLX SOX Semiconductor Sector Index, but valuation usually isn’t the concern here. Demand and pricing trends are. On that note, what would stand in the way of more near-term upside for Micron would be the markets pricing in further downside to DRAM prices, something some investors aren’t ruling out.

“Nonetheless, it remains to be seen whether the DRAM chip price has actually hit the bottom in that the price stopped falling with the inventory and demand as they are,” said Mirae Asset Daewoo analyst Kim Young-gun to Business Korea. “Another industry source also said that the recovery of the industry is being postponed and it cannot be said for sure whether the price will continue to move sideways.”

Due to the highly commoditized nature of the DRAM and NAND markets, Micron may not get enough credit for the company’s operating performance, which includes better return on asset and return on invested capital than some larger chipmakers, but that’s more a symptom or risks associated with this name, not an indication of an undervalued stock.

Todd Shriber does not own any of the aforementioned securities.

Todd Shriber has been an InvestorPlace contributor since 2014.


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/momentum-in-micron-stock-is-for-real/.

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