It’s been another standout year for Micron (NASDAQ:MU) stock, with the shares up about 30%. On a relative basis, the performance has beat companies like Tesla (NASDAQ:TSLA), Google (NASDAQ:GOOGL) and even Facebook (NASDAQ:FB).
Yet, lately, MU stock has been coming under some pressure. Since early June, the shares have gone from $62.60 to $52.63.
Now, part of this has been due to profit-taking. This is definitely natural, especially as markets have been more volatile.
But, then again, there are still some issues with the fundamentals of MU stock. For example, the company is in the process of unwinding its strategic relationships with Intel (NASDAQ:INTC) to develop nonvolatile memory chips. Granted, this will allow MU more opportunities to control its product roadmap and to focus on high-margin opportunities. However, there are still risks. Let’s face it, MU will have to take on new costs and there will not be the benefit of Intel’s engineering teams. The company will probably — at some point — have to build its own facilities, adding to the capital costs.
In the meantime, there is also the nagging unease about capacity. MU is in a highly cyclical industry — and an oversupply of chips can wreck profits.
Although, at least for now, there are few signs that things are getting out of hand. It certainly helps that the global memory chip industry is an oligopoly and the players have remained fairly restrained in their actions. According to BlueFin’s Paul Peterson: “Our recent Asia trip reaffirmed our relatively bullish views on the memory market.”
This is a similar sentiment of other analysts like Mizuho Securities’ Vijay Rakesh and Evercore’s C.J. Muse.
Something else: the demand situation should remain robust. There are various megatrends — like cloud computing, AI (Artificial Intelligence), machine learning, mobile and AR (Augmented Reality) — that are driving the need for memory chips.
OK then, so what about trade? Well, this is definitely a legitimate concern. Recently Micron was hit with an injunction that prohibited the company from selling a variety of chips in China (this stemmed from a patent dispute). And, yes, the shares took a hit on this news.
However, it is far from clear if the consequences will be meaningful. Keep in mind that the injunction impacts about 1% of overall revenues. What’s more, China really needs a plentiful supply of memory chips. Note that the country does not have the capacity to produce this technology at scale. In other words, the legal situation may be settled at some point — probably sooner than later.
Bottom Line on MU Stock
I’ve been a bull on MU stock for some time. For the most part, I think the growth story is still intact. Again, the company has core memory technologies that are critical to major market categories.
MU stock is also cheap, with the forward price-to-earnings ratio at a measly 5.5. In fact, it may get even lower because of the potential for massive buybacks. Nomura’s Romit Shah believes they could be as high as $10 billion (his price target is $100 on the shares). Consider that the current market cap of MU stock $63 billion.
It’s true that there will probably be further complications with trade — which will remain a wild card. But the valuation seems to account for this already. So, all in all, for investors looking at MU stock, it still looks like a buy.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
