Micron (NASDAQ:MU) has traded in a range since the summer as Micron stock suffers from a kind of divergence. As the crypto-inspired glut in chips comes to an end, China has again taken center stage. Like in the past, just when the two sides appear on the verge of a trade agreement, events get in the way of such a deal becoming finalized.
This trade tension has and probably will continue to keep MU stock down in the near term. However, over time, technological change looks poised to drive Micron higher in time. For these reasons, profiting from Micron stock will hinge on understanding which influence is dominant at what time.
Many investment gurus will tell you to buy stocks cheap. However, MU stock has traded at a single-digit, forward price-to-earnings (PE) ratio for years. This is likely because the stock’s cyclical nature is a known quantity. Even when MU appears unstoppable, everyone knows a chip slump will send it plunging. This means investors should not trade this on valuation.
Micron Appears Uncertain Shorter-Term
Instead, Micron has become a tale of two opposing influences. Long term, I expect the forces driving Micron stock will boost MU over the long run.
However, the short-term influence, as we all know, is China. As usual, just when the U.S. and China appear to have come to a trade agreement, events get in the way. Trade tensions have increased again. President Trump signed the Hong Kong Human Rights and Decency Act over objections from China.
The People’s Republic retaliated by disallowing visits to Hong Kong by U.S. warships and imposing sanctions on some non-government organizations. More importantly to holders of MU stock, the latest dispute casts doubt over trade talks and could lead to China responding by abandoning the negotiations.
This is hardly unique to Micron. Intel (NASDAQ:INTC), Qualcomm (NASDAQ:QCOM), Nvidia (NASDAQ:NVDA), and other chip companies have seen their stocks suffer on U.S.-China trade tensions.
Micron has shown more cyclical trading patterns than the equities mentioned above, so traders must watch MU more carefully. Moreover, China accounted for $17.36 billion of company sales. Sales for the rest of the world, including the U.S., amounted to just over $13.03 billion.
Why Traders Should Buy for the Long Term
On the other side is a technological change that has just begun to drive the demand for memory chips exponentially higher.
As I mentioned in my previous article, I would not expect the cyclical nature of MU stock to change. However, the rise of artificial intelligence (AI), virtual reality (VR), The Internet of Things (IoT), and other technologies have increased the demand for memory chips exponentially.
This has already shown up in the trading patterns of Micron. A low of $28.39 per share during the last slump in chip sales shows that this cycle has moderated. Previous downturns often took MU stock into the single digits.
Moreover, now that consumers have just begun to adopt 5G, it will serve as a catalyst for more use of these technologies. As tech depends ever more on wireless and 5G, MU stock should eventually begin a cycle that could take Micron back to its all-time high of $97.50 per share and perhaps beyond.
The Bottom Line on Micron Stock
China trade talks will define Micron until technology takes over. Just as it appeared the U.S. and China would sign a trade deal, tensions over Hong Kong now place that agreement in doubt. For this reason, I see MU stock either trading at the same levels or falling slightly over the near term.
However, consumers and businesses have now begun to adopt 5G. As this technology becomes more affordable and accessible, memory demand and, in turn, MU stock will continue to rise. While I do not think this will eliminate cycles in MU, I do believe it will lead to less extreme fluctuations than investors saw during the PC era.
Once Micron becomes a 5G rather than a China story, the stock should begin its next great bull run.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
