- Micron stock has rocketed lately due to promising fundamentals and rising DRAM prices.
- 3D NAND and 3D XPoint sales look promising as demand is expected to exceed supply.
- Interest rates and high valuations in the sector at present could put a lid on things in the near term.
Any stock that basically doubles in 6 months (no matter how attractive the fundamentals are) has to be watched carefully. Despite reporting poor fourth quarter earnings, Micron (NSDQ:MU) is now trading higher. At around $19 a share, MU stock is moons away from where it was back in May of this year. The company reported sales of $3.22 billion in its fiscal fourth quarter, which was $380 million shy of what it had reported in the same quarter in 2015. Micron's poor fourth quarter resulted in the company reporting a loss of $276 million for the year. However, after a brief 5% dip in the share price post earnings, the stock has come roaring back due to Micron's guidance for fiscal 2017. Furthermore, the management enlightened investors that the Inotera deal would close in December, which is promising.
Micron's Stock Flying High From Rising DRAM Prices
Although Micron already owns a third of the company, with Inotera growing its top line by 20%+ levels at present, the closure of this deal is likely to add considerable value to Micron, despite the delays. The one worry investors may have is the increased exposure to the DRAM market, which has the potential to hurt Micron in periods of oversupply. This could happen easily if the likes of Samsung or SK Hynix ramp up DRAM production significantly, but this doesn't seem likely at this stage. Why? Because both manufacturers decided to switch their attention to NAND, and specifically 3D NAND in summer, since that is where the future lies.
This has raised prices in the near term for DRAM which is bullish for Micron (as it hasn't slowed down its DRAM production). Furthermore for Micron's competitors to return to the DRAM market in a big way would mean more cost and resources on their part. It could not be done overnight, which makes me believe that they won't increase their production significantly in the near term. In saying this, Dram demand will not be the only thing that will drive Micron's share price going forward.
Although DRAM Makes Up Most of The Revenue, NAND Has Better Fundamentals
With the company deriving 60%+ sales from the DRAM side of its business, the question investors have to ask now is, how much of the DRAM price increase (over the past two months) is baked into the share price. In saying this, the company has plenty more growth triggers. 3D NAND and 3D XPoint technology should drive growth in fiscal 2017, as demand is expected to exceed supply. Micron's fundamentals in this space look very good at present, but investors need to take note of the cyclical nature of this industry.
Supply and Demand imbalances or better product offerings from one of Micron's competitors could derail its earnings projections for the next few years. In fact, analysts are expecting almost 28% earnings growth next year, which must be very difficult to predict considering macro factors. Micron's share price is up 15%+ since the 4th of November, easily outperforming the Nasdaq and S&P500. However, now may be the time to take some capital off the table for a number of reasons.
Interest Rates Are Rising & The Semiconductor Index Is Top Heavy At Present
It is not just Micron which has had an explosive November, but also the Semiconductor index in general. We are heavily overbought here and due for a pullback at any time. Remember if we get a pullback in the stock market, Micron stock will underperform heavily due to its volatile nature. The chart shown below illustrates that the semiconductor index's 200-day moving average is significantly lower than where the index is trading at present. Either we need a long period of stagnation or a swift move down. I fear it could be the latter.
Also Read: A Turnaround Is Imminent For Micron
Why? Because, with long-term bond yields spiking, I think it is only a matter of time before we see this sustained selling transfer over into the equity markets. Rising interest rates will curb demand for many companies across many asset classes. Smartphone sales would be one area to look at for Micron. Why? Because if this area did indeed slowdown, it would hurt Micron (oversupply issues), as presently, it must keep its R&D budget elevated to ensure it is at the cutting edge of the 3D NAND transition.
To sum up, I believe now would be a prudent time to take some money off the table, when it comes to long Micron positions. The stock has more than doubled since May, and despite having sound fundamentals at present, macro factors could throw a spanner in the works. Evaluating tech stocks? Check out Amigobulls' top technology stock picks, which have beaten the NASDAQ by over 110%.