Shares of Micron (NASDAQ:MU) continue to struggle as earnings and revenue fall off a cliff. For investors who wonder why this name only trades at four or five times earnings when times are good, this is it. The business is simply way too volatile for MU stock to command a market multiple.
Micron’s fiscal 2019 year ended in August. However, even as earnings and revenue declined significantly — down about 54% and 23%, respectively — Micron stock is just a few dollars away from its 52-week highs. How is that possible?
If investors believe Micron’s business is at or near a trough, then they may start snapping up the stock. Remember, the stock market is a forward-looking mechanism. Companies are punished and rewarded based on what the market believes it will do, not what it has done.
For instance, Arista Networks (NASDAQ:ANET) wasn’t rewarded for a top- and bottom-line beat on Oct. 31. Instead, it was punished for reporting a huge shortfall in guidance.
If Micron stock is truly set to trough in the next six months or so, shares could have upside. If not, then investors need to worry about downside. Let’s take a look at the charts, then at the story.
Trading MU Stock
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The question investors have now is, can MU stock go on to hit new highs? The current 52-week high sits up at $51.39, which was in September. Now near $47.50, the stock isn’t all that far away from pushing higher. The recent rally took shares to $49.17 before pulling back.
Fortunately for bulls, that pullback was met by a bounce at the 50-day moving average. For tactical traders, that gives short-term bulls a tradable low to measure against. It also puts the recent high back on the table.
I’m not a big head-and-shoulders trader, which is outlined on the chart via purple lines. Above the October high of $49.17 and it should negate this bearish setup. A move over that mark will also put new highs into discussion, as shares will be about $2 away from doing so.
In the first few months of 2019, MU stock tried to breakout over $44 to $45, as uptrend support (blue line) guided shares higher. It failed to happen, as resistance held firm and shares cratered to $33.
Now above this previous resistance mark, bulls desperately need MU stock to stay above $44. If it can, it increases the odds that it will eventually make new highs sooner rather than later. Below $44 puts recent support near $42 on the table. Before that test though, I’d like to see how Micron’s potential pullback does on a test of the 100-day moving average.
Keep it simple: Watch $44 to $45 on the downside and $49.17 on the upside. Over the latter and $51.39 is on the table.
Bottom Line on Micron Stock
Right now, semiconductor, chip and memory stocks are in demand. That’s true for Nvidia (NASDAQ:NVDA), Advanced Micro Devices (NASDAQ:AMD) and Intel (NASDAQ:INTC), as much as it is for Micron stock.
From a technical perspective, MU stock looks bullish. From a fundamental view, the situation could be better.
When Micron reported its fiscal fourth-quarter results in late September, shares were hammered. While the company beat on earnings and revenue expectations, they declined 33% and 42% year-over-year, respectively. Still, the bottom-line decline is better than the full-year decline, where earnings slipped 52%.
Free cash flow was down significantly too, both in the quarter and for the year. In Q4, free cash flow fell 47.8%, slightly better than the full-year decline of 55.6%. The silver lining? Free cash flow for both timeframes was still positive.
Are we out of the woods with Micron? Not yet. Revenue is forecast to fall 11.5% this fiscal year, with estimates calling for another 50%-plus decline to earnings. That said, MU stock has been doing better. Investors need to listen when the technicals are speaking – just as they need to listen when the fundamentals give hints.
Overall, I would be cautiously optimistic on Micron at this time.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long NVDA.
