For technology and semiconductor firms like Micron Technology (NASDAQ:MU), the recent thaw in U.S.-China relations couldn’t have come at a better time. Despite strong ideological differences, China has emerged as an unprecedented market for various industries. Therefore, the upside credibility of Micron stock depended in large part on geopolitical factors.
Better yet, optimistic signs have sprouted in the company’s core NAND and DRAM memory chip businesses. Notably, Susquehanna Financial Group analyst Mehdi Hosseini upgraded his outlook on MU stock to “positive” from “neutral.” Central to Hosseini’s thesis is a recovery in memory chip pricing for 2020 and 2021.
This view isn’t at all unreasonable. To quickly summarize, DRAM memory is typically found in personal computers and data servers. On the other hand, NAND chips are utilized by smartphone manufacturers, as well as solid-state drives. Both memory types have ample demand, particularly as computing moves into the cloud and the introduction of 5G technologies become more widespread. Therefore, the upside potential for Micron stock appears bright and viable.
However, the NAND and DRAM markets are notoriously volatile. For instance, NAND flash memory prices for various capacities fell precipitously in 2018 following a rebound in 2016 and 2017. While a rebound seems reasonable based on prior historical pricing trends, here’s the kicker: there’s no guarantee that history will repeat or resemble itself.
And if pricing doesn’t improve, that puts MU stock in a quandary.
During the heated portion of the Beijing-Washington trade war, the international semiconductor industry had no incentive to create a balanced supply-demand ecosystem. As such, a huge supply glut still exists, presenting a cloud over hot-running Micron stock.
Can investors still trust this name, or should they move on to more credible opportunities?
Catalysts for Micron Stock Stronger than the Pitfalls
Although underlying events appear positive for MU stock, it’s hard not to think that the glass might be half-empty this time around. Since Christmas Eve, shares have dipped nearly 4%. Those are losses that you can’t ignore. They also suggest a return to the wildness that has characterized semiconductor stocks over the last few years.
That said, I believe investors can take a more optimistic approach to Micron stock. For starters, memory chip prices will eventually fall because they are essentially designed to. Technology expert John C. McCallum created a very useful chart regarding the historical cost of computer memory and storage chips. Over a long enough time horizon, memory chips either fall to zero (because they’re irrelevant) or get pretty darn close.
Thus, the pricing debate already has an inevitable victor. Arguably, though, computer chips are about as small as they’re ever going to be. Therefore, the real debate isn’t necessarily about size and capacity but rather, functionality.
Here, the underlying fundamentals are unambiguously positive for MU stock (and to be fair, the competition). Thanks to the 5G rollout, many innovations, such as artificial intelligence and automated transportation, can now be actualized because of the 5G network’s incredible speed and data capacity.
Appropriately, Micron laid out its five-pronged approach to the 5G network, which involves mobile, automotive, the Internet of Things, networking, and cloud computing. And this is also where Micron stock has a distinction: the tech firm isn’t just about pumping out chips but rather, developing platforms that maximize various innovations’ full potential.
Geopolitically, it doesn’t hurt MU stock that the Chinese tech industry has a massive credibility problem. As Micron would know, trust is a valuable commodity in tech. They’re able to provide it far better than most Chinese counterparts.
Expect Nearer-term Turbulence
From a longer-term perspective, then, I’m not terribly worried about the memory pricing issues. As I mentioned, prices will eventually fall due to advancements in technology. What matters more is the opportunity for revenue growth that 5G provides.
However, I’d be remiss not to mention the technical situation for Micron stock. Currently, shares are a bit overheated. Plus, in the near term, memory pricing matters quite a bit. As things stand, MU could possibly fall to at least its 50-day moving average (around $49).
Once the turbulence fades, though, I believe MU stock offers a solid opportunity. In my view, Micron isn’t just participating in the 5G revolution; it’s actively leading it. So, don’t let the memory chip market be the ultimate deciding factor.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
