Micron Stock: China Remains a Major Red Flag

A quick glance at the chart of Micron Technology (NASDAQ:MU) shows that this year has been particularly volatile for MU stock.  Then again, Micron stock is often volatile.  And besides,  MU stock is still up an impressive 35% in 2019.

Looks like This Momentum in Micron Stock Is for Real

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Its performance has actually led some investors to believe that its memory chip business has undergone a fundamental change. They contend that the sector’s boom-bust cycles have ended.

They say that the busts have been eliminated by megatrends – such as mobile, IoT (Internet-of-Things) and AI – that require large amounts of memory.

But I still think investors should be cautious about MU stock. Just look at MU’s latest earnings report. In its fiscal fourth quarter, MU’s revenues plunged 42% to $4.87 billion and its earnings per share came in at 49 cents.

It’s true that the company’s top line beat analysts’ average estimate of $4.59 billion.  Its bottom-line guidance, however, came in below their average outlook. MU expects that its Q1 EPS will come in at 39 cents to 53 cents per share . Analysts’ average EPS estimate, on the other hand, was 53 cents.  In last year’s Q1, its EPS was $2.81.

In other words, it looks like a quick recovery is not in the cards. Yet on the earnings call, Micron CEO Sanjay Mehrotra did try to highlight the silver linings, saying: “Despite the challenging industry environment, we achieved the second-best year in our history for revenue, free cash flow and earnings, which underscores the strength of the new Micron.”

But Wall Street was far from convinced. After the earnings were released, MU stock dropped by more than 11%.

The China Issue

A good indication that it will take time for growth to come back is Micron’s capex plan. For fiscal 2020, the company expects to spend $7 billion to $8 billion, versus the prior year’s $9 billion.

Part of the decline is likely due to the deceleration of the global economy.  The macro environment is rough, so it’s difficult to make long-term commitments.

But Micron also has substantial exposure to China in general and Chinese telecom  technology company Huawei in particular. (It’s estimated that over 10% of MU’s revenue comes from Huawei).  The U.S. has greatly restricted sales to Huawei. MU is trying to find remedies to this situation, but the outcome of its efforts is unknown.

In the meantime, inventory levels for Micron’s NAND systems continue to be elevated, weighing on its top line. The recent drops of memory prices are also far from encouraging. According to Raymond James analyst Chris Caso, memory prices dropped 20% in Q3 versus Q2, and a recovery may not come until the second half of 2020.

The Bottom Line on MU Stock

Micron’s management has done a great job maintaining its profitability even as its revenues have dropped. That is a testament to the efficiency and discipline of the organization.

The valuation of Micron stock is also reasonable, as its forward price-earnings multiple is only about eight. By comparison, the forward P/E ratios of Broadcom (NASDAQ:AVGO), Western Digital (NASDAQ:WDC) and Intel (NASDAQ:INTC) are roughly 12.

But the problem is that MU’s growth may remain sluggish for quite some time. And Huawei is a wild card for MU stock.

Thus, there are really few positive catalysts for MU. So for now, it’s probably best to avoid MU stock.

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/10/micron-stock-china-remains-a-major-red-flag/.

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