Management Holding Steady Is the Right Move for Micron Stock

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At first glance, Micron Technology (NASDAQ:MU) appears like a ridiculously undervalued technology play. Famous for its memory chips, Micron features an incredibly relevant business. Despite obvious risks to tech which we’ll discuss further, our society has become increasingly digitalized. Thus, its products will have high demand. Nevertheless, MU stock sports a single-digit price-to-earnings ratio.

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Additionally, Micron stock has held up well relative to other semiconductor firms. On a year-to-date basis, MU has gained 25%. This compares favorably to broader sector heavyweights like Intel (NASDAQ:INTC), up 18% YTD.

Yet the overriding concern for MU stock remains the U.S.-China trade war and its associated tit-for-tat tariffs. Although the two economically warring sides have agreed to a temporary truce, this conflict has lost credibility, so to speak. After all, we’ve seen promises earlier that a resolution is forthcoming, only to be disappointed.

More critically for Micron stock, because the trade war lasted for so long, it has deeply impacted the U.S. economy. CNN Business contributor Christine Romans offered a pointed analogy of this crisis. Romans wrote:

Think of it like this. A year ago, those tariffs were like a nasty cold. Irritating but temporary. Today, for multinational companies, the cold has become a chronic condition.

Even more bad news for MU stock and tech in general, a Reuters poll of economists suggested that the trade truce “is not an economic turning point.” Additionally, recent high-level talks between U.S. and Chinese negotiators have done little to change the economic trajectory positively.

With Micron stock absorbing hits from trade war-induced headwinds, this poll is worrisome. Nevertheless, a silver lining exists in this otherwise troubling narrative.

Management Making the Right Moves for MU Stock

Historically, Micron has lagged direct rivals Samsung and SK Hynix in memory chip technologies, specifically DRAM. A major reason why is that Samsung and SK Hynix are low-cost producers. As DRAM transitioned from groundbreaking innovation to commoditized asset, the latter two companies simply won out, hurting Micron stock.

But in recent years, Micron started to get its act together. In an otherwise grossly disappointing fiscal fourth-quarter earnings report where MU reported a 42% loss of revenue year-over-year, management at least delivered one piece of good news: DRAM chips contributed 63% of Micron’s revenue and they represented a higher percentage of profits.

In other words, Micron was finally catching up to its direct competitors. While the company was always big on innovation, it wasn’t always operationally efficient. Now it has the best of both worlds, boding well for MU stock.

But in this race to catch up to Samsung and SK Hynix, Micron hasn’t actively embraced the next generation of memory chip production. Called extreme ultraviolet (EUV) lithography, it potentially could change the game for the underlying industry. Samsung and SK Hynix are on board, but Micron has been pensive.

Ordinarily, I wouldn’t take encouragement from this behavior, especially for a tech firm. But for MU stock, I think the company’s cautionary approach is the correct one.

While EUV lithography is an exciting step forward in chip production, it’s a fresh concept. Like buying a car model on its first production run, problems could sprout up later.

More critically, Micron has experienced uniformity issues with their EUV tests. In order to remedy this problem, the company would have to utilize an intensive, complicated procedure. Unfortunately, this would only ramp up costs for Micron, making EUV lithography practically untenable.

It’s All About Context

Of course, a flip side exists to the above strategic move. Without an active push toward EUV development and integration, Micron risks falling behind to its rivals yet again. Frustratingly, stakeholders of Micron stock would find themselves going back full circle.

Outside of the trade war, I would agree with this point. Obviously, that’s not the world we live in. Further, the economic conflict has imposed real costs to Micron. As I said earlier, the company lost almost half of its fiscal Q4 revenue to China-related headwinds.

And when you factor in the heightened possibility of a U.S. recession, I’m more encouraged with management’s decision. This isn’t the time to play around with a still shaky innovation, especially with Micron now dominating in DRAM.

Now, let me back up a little bit: this isn’t the most comfortable endorsement of MU stock. However, it’s clear that management has a bottom-line focus right now. Given the circumstances, MU appears a smart, undervalued pick in the memory chip segment.

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

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/management-holding-steady-is-the-right-move-for-micron-stock/.

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