Since early 2018, Micron Technology (NASDAQ:MU), one of the most important chip makers, and MU stock have been poster children for the controversial relationship between the U.S. and China.
But in 2019, MU stock is up 47%. Similarly, the iShares PHLX Semiconductor ETF (NASDAQ:SOXX) is up about 46%. Although I believe in the long-term fundamental strength of Micron stock, I am expecting December to be a volatile month for MU stock as the trade war either intensifies or wanes. Considering how far the shares have gone in 2019, many investors may find it premature to bet Micron shares will go higher soon. Instead, they may wait to hit the “buy” button until the company’s next earnings report, expected to be released in mid-December.
What to Expect From MU’s Next Earnings Results
On Sept. 26, Micron reported its fiscal Q4 results. The company’s revenue and earnings per share both came in slightly above analysts’ average estimates.
But the company’s revenue tumbled 42% year-over-year and its net income plunged 87% YoY.
Following the earnings report, MU stock initially stumbled. However, since then it has fully recovered. In other words, Micron stock tends to be highly volatile after it reports its results.
When MU releases its Q1 results soon, analysts will scrutinize the sales of the two main types of computer memory produced by the company: DRAM and NAND.
DRAM is used to retain the data needed by computer processors to function. Micron is the world’s third largest maker of DRAM chips.
NAND flash memory is used for data storage. Globally, Micron is the fourth largest maker of NAND chips.
The DRAM market is bigger than the NAND market, and MU faces less competition in the latter market. DRAM is also more profitable for MU than NAND.
Micron’s Strong Products Will Likely Propel MU Stock Higher
According to recent research by Rachel Rice at the University of Nebraska at Omaha, “Micron has continuously been on the cutting edge of development. [But] the biggest problem in the industry currently is the level of competitiveness… and the nature of the product[s] lead to price competition.”
Given those dynamics, Wall Street closely follows DRAM and NAND prices as well as their demand and supply levels.
When DRAM prices increase, Micron raises its DRAM output to exploit the high prices. Higher supply eventually leads to falling prices and declining revenues.
In 2019, there have been signs that the downturn of the memory chip market is beginning to ease. These signs have contributed to the rally of MU stock.
During MU’s Q4 conference call, its management said that in fiscal 2020, MU would be spending less on DRAM and NAND supply increases. As customers’ inventories go down, prices should also stay stable. Thus in a few quarters, MU’s earnings will likely improve.
Semiconductors like Micron play a major role in the global economy And despite recent economic and memory price challenges, Wall Street is bullish on global demand for memory products.
Demand for memory is climbing thanks to the increased use of smart devices, the proliferation of of data centers, and the deployment of new technologies such as the IoT (Internet of Things) and 5G (fifth-generation) wireless.
This demand growth will likely benefit the owners of MU stock for many years.
The Short-Term Headwinds Facing Micron Stock
However, there are two main issues that may derail MU’s revenue growth and Micron stock price.
The Trade War: Micron has been one of the most front-and-center companies in the U.S.-China trade war. MU has many China-based customers, including the controversial firm Huawei. Over half of Micron’s sales come from China.
The two countries’ style of negotiating makes me doubt if there will be a swift resolution to the trade war. And as long as the trade skirmish continues, the volatility of Micron stock and the sporadic negative bias towards MU is likely to continue.
A Potential Economic Slowdown:
Many analysts regard the semiconductor sector as an important leading indicator for the health of the economy. Therefore if the global economy slows in 2020, then MU stock price is likely to be adversely affected.
So Should Investors Buy Micron Stock Now?
Over the past year, analysts have had mixed views on MU stock, which is to be expected given the level of uncertainty in the industry and the stock market.
In addition, the charts of MU make it hard for me to be fully constructive on MU stock right now.
$50 is an important resistance level for MU. Therefore, in the next few weeks, I expect MU stock to trade between $42.5 and $47.5.
Investors who do not yet hold MU stock may want to study the company’s Q1 results to try to determine if demand for the company’s products are recovering and if softening chip prices and compressed margins are behind us.
I’d look to be a buyer of the stock as Micron stock approaches the low-$40s.
As of this writing, the author did not hold a position in any of the aforementioned securities.