There’s a Bumpy Road Ahead for MU Stock

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The market’s impressive new highs have lined Wall Street’s pockets over the past few weeks, but many are still worried about the potential for a downturn as economic and political uncertainty continues to cast a shadow over the market. The ongoing trade talks with China have yielded a collective sigh of relief among traders who appear to be all but certain that a “phase one” deal is about to be signed. That’s been good news for companies like Micron (NASDAQ:MU) that do a lot of business in China.

While the immediate outlook is choppy for MU stock, the bigger picture is compelling.
Source: Charles Knowles / Shutterstock.com

However, even with Trump’s optimism about a preliminary trade agreement with China, MU stock’s concerns don’t end there. The firm is also facing worries about declining demand and increased competition in the sector. Here’s a look at the factors that could sink Micron stock before the year is out.

Trade Tension

Despite all of the optimism surrounding a potential trade deal, there’s still a relatively good chance that the U.S. and China won’t reach a deal before a planned round of new tariffs in mid-December. That’s because tensions between the two nations have escalated significantly over the past month.

Violent protests against China’s influence over Hong Kong could hurt the chances of a lasting truce between Washington and Beijing. U.S. lawmakers have fast-tracked a bill that scrutinizes Hong Kong’s autonomy and could open the door for the U.S. to revoke Hong Kong’s special trade status if China’s military intervenes in the protests.

China’s lawmakers have expressed disapproval of American attempts to interfere in internal affairs. The disagreement over Hong Kong could put pressure on future trade talks.

Plus, a New York Times article detailing Beijing’s treatment of Muslims has also prompted a sharp response from Beijing. Outrage over the nation’s “re-education centers,” where it has detained more than a million Muslims, puts pressure on U.S. lawmakers to take a hard line against the nation. Both of those issues have the potential to disrupt Trump’s negotiations.

That would be bad news for Micron, where over half of the firm’s sales come from China. Micron sells about 13% of its products to Huawei, a Chinese firm that has become somewhat of a target for the Trump administration.

Micron Performance Concerns

MU stock is also struggling against concerns about pricing drops and decreasing demand in the memory market. The semiconductor market is cyclical and right now, Micron appears to be in a down cycle as supply outweighs demand. It’s difficult to predict when things will turn around, which is what makes semiconductor stocks’ behavior hard to predict.

The result of the imbalance has been pricing declines for Micron, which in turn has hurt the firm’s bottom line. Earnings per share was down 84% in the firm’s fiscal fourth-quarter results, and management warned more of the same was coming. While MU stock’s pricing declines have been detrimental to the firm’s forward progress, it’s worth noting that the declines have started to slow, suggesting 2020 could be a turnaround year for Micron stock.

Silver Lining

The semiconductor space has been challenging in recent months, but Micron has proven itself during the lean times by turning a profit despite being in a down cycle.

That says a lot about Micron’s potential to thrive when the sector improves — a scenario that could be on the horizon. MU stock looks poised to be a winner in the 5G market as one of only 3 DRAM manufacturers in the world. Its technology will be an important part of the 5G revolution as data storage needs rise in order to power things like autonomous driving and the Internet of Things.

The Bottom Line for MU Stock

The end of the year looks bumpy for MU stock, especially if China and the US can’t work out a trade agreement. As long as trade tensions are on the table, Micron will be feeling the effects. With that said, MU’s long-term future looks bright. Moreover, the case for taking up a position now if you’ve got time and can handle the turbulence is compelling. MU looks like a winner in the semiconductor space long term. But the firm’s heavy reliance on China makes it a risky play in the near term.

As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.

Marie Brodbeck has a Finance degree from Duquesne University and has been a financial journalist for more than a decade. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN.


Article printed from InvestorPlace Media, https://investorplace.com/2019/11/bumpy-road-ahead-for-mu-stock/.

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