- Micron has had an explosive rally since mid May. Many are expecting a pull back which may never materialize.
- Micron's NAND divisions is where future growth will come from. Next generation 3D products and solid state drives will drive earnings.
- I would not hold this stock beyond $20 a share. Micron is a favorable position at present that may not last going forward.
Micron (NASDAQ:MU) has rallied from sub $10 a share a few short weeks ago to over $13. Many analysts have reversed course on this stock by increasing their projections up to $18 a share. This could actually happen very quickly but by no means is Micron a long investment which one can hold indefinitely. Why? Well, long term buy and holds are stocks that can weather economic downturns by increasing sales and profits every year.
This is not to say that Micron is not without opportunity. It certainly is but let's go through its long-term fundamental metrics (10 year) which illustrate the volatility and cyclical nature of this sector. Furthermore, since Micron's fiscal year starts in September, I'm going to include trailing twelve-month averages in our exercise.
|Net Income||$1,071 billion - Pass|
|Free Cash Flow||- $460 million (10-Year Trend Is Down) - Fail|
|Revenues||$13.73 billion (10-Year Trend Is Up) - Pass|
|Operating Margins||9.4% - (10-Year Trend Is Down) - Fail|
|Price History of the stock||Down 21% in the last 10 years - Fail|
|Healthy balance sheet||Total assets = $24.14 billion (10-Year Trend Is Up) - Pass|
|Resistant to recessions?||Share Price Collapsed during the recession of 2008 - Fail|
Many investors quickly get attracted to a stock that has undoubtedly been oversold and has good short-term fundamentals. This sums up Micron perfectly. The company definitely seems to be in a favorable position regarding its NAND portfolio and this is where investors will be focusing. The mobile business unit, for example, is where gains are expected to improve meaningfully over the next few quarters. This division (which traditionally has made up almost a quarter of revenues) saw profits slump recently due to lower smart phone sales. However, this trend seems to be reversing and when you combine this with Micron's new 3-D NAND flash products (which are scheduled to be installed in flagship smartphones at the back end of this year), mobile sales are expected to drive earnings going forward.
Furthermore, investors shouldn't forget the fact that recently a Chinese firm known as Tsinghua Unigroup tried to acquire Micron for $23 billion or $21 a share but it was flatly rejected by management. This should give investors hope as to what management believes the company is really worth. Many believe that deal would have never gone through in any event due to US regulators but there may be very well another way that Micron can cash in on heavy interest from Chinese companies. In fact, China is aiming to invest over $50 billion in Chinese chip businesses before 2020 but the fact remains that companies continue to look for leverage and that's where Micron ticks all the boxes. Why? Well, Micron is strong in all major memory markets which would definitely interest a joint venture from a Chinese company.
The benefit for Micron is that it would be able to sell its products under a Chinese brand name (a trend which is increasing among western companies) which would definitely give it more leverage in the country. Furthermore, Micron would continue to control production decisions in any joint venture which shareholders would demand. Therefore, don't be surprised to see a Chinese outfit buy some equity in the near future and if it takes place, I could only see the stock rising after the announcement takes place.
The near-term problem is that the company is announcing earnings on the 23rd of June and they are expected to be ugly due to low Dram applications. Moreover the company's NAND initiatives especially in mobile probably won't gain traction until the end of the year so I'm expecting another weak guidance number for the forthcoming quarter. Also, we are way overbought on the daily chart. The May rally has pierced through the 50 day moving average but the stock is soon going to come up against heavy resistance at its 200 daily moving average. Therefore, weak guidance combined with a regression to the mean in the stock could easily tank the stock back to $10 a share levels. Sentiment is also at its highest level so far this year which illustrates to me that lower prices are ahead in the near term.
Source : Sentimentrader.com
To sum up, although I believe Micron could easily get to $20 a share, near-term risk is a distinct possibility. Investors will get a better entry point than here unless guidance for the forthcoming quarter is strong. Micron's big initiatives such as 3D X Point has the potential to transform the company but it is going to take time. Furthermore, a large equity stake from a Chinese partner would definitely help Micron close the "cost" gap.