- DRAM demand remains crucial in the near term as Micron Technology, Inc. continues its transition into 3D NAND.
- If the S&P500 undergoes a profit taking event, Micron stock could easily fall 10%+.
- Micron's recently introduced 3D NAND for mobile is the first technology of its kind in this space.
Micron Technology, Inc. (NSDQ:MU) is now trading at over $15.50 a share and the stock seems to be really gaining momentum ahead of its fiscal fourth quarter results which will be announced in early October. In fact with DRAM and NAND prices recently starting to rise, fourth quarter guidance looks a little light to me, which is why the stock has been catching a strong wind recently. I wrote recently about the fundamentals of Micron and its competitors, stating that Micron is set to benefit meaningfully from higher DRAM demand due to competitors such as Samsung and SK Hynix reducing their exposure in this area.
The above-mentioned competitors saw that Micron was gaining an advantage in the NAND area (the future of memory) and subsequently poured more resources into NAND as a result. In hindsight, deciding to invest more into the DRAM side of the business now looks like a masterstroke from Micron. Why? Well, as the transition continues into its DRAM nodes & 3D NAND, Micron has bought itself time with its DRAM coverage. In fact, I feel its recent restructuring announcement would have been far costlier if Micron didn't increase its DRAM exposure. Therefore, a strong earnings beat could really catapult this stock in a few months time so investors with a healthy risk tolerance should think about scaling into the stock at these levels.
DRAM Sales Volumes Are Rising. Margins Over Time Will Follow
Despite Micron reporting a loss of $215 million in its third quarter, this was more a reflection of price than poor company fundamentals. In fact on the DRAM side, for example, Micron increased its volumes by 22% but top line only grew by 9% which illustrated the poor DRAM pricing environment Micron has had to deal with for the last 12 months or so. Micron can only do so much (through restructuring & better productivity) and must have a vibrant pricing environment in order to post robust earnings every quarter.
Well, that may be changing now as DRAM prices have started to rise. I'm focusing on DRAM because it still makes up the lion's share of the company's revenue and is vital in the near term to ensure a successful transition to the 3D NAND side of the business. DRAM prices have really rebounded since the end of the third quarter which is why I feel Micron will surprise many analysts with its DRAM sales in the fourth quarter.
The chart shown below really shows how much prices have fallen in this segment of the business. Demand from mobile and server applications will drive DRAM prices up as well as tight supply in NAND. Higher DRAM prices and revenues in the near term are crucial for Micron to avoid more restructuring. I believe we will get both in the fourth quarter.
Equities Are Long Overdue A Pullback But Will It Happen?
The rally out of the May lows has been unprecedented but I would caution investors that taking profits now may be a mistake. Yes, the 5 day RSI indicator is at overvalued levels and the market is definitely due to dip down into its own daily cycle low at any point now but both Micron and equity indexes could keep on charging higher. The advantage Micron has at present is that even if equity indices do undergo some profit taking, NAND & DRAM prices could continue to rise which will keep Micron stock elevated. Every 30 or so trading days, we usually get a profit taking cycle in the S&P500, which means we are definitely due one sometime soon. In saying this, US presidential elections normally take place alongside rising stock markets so a pullback here simply may not happen. Therefore one could place a stop loss under a Micron long position to hedge against a possible pullback.
Does Micron Have A First Mover Advantage In 3D NAND Technology?
Investors need to look past the top line decline Micron has seen for 7 quarters now but concentrate on what is coming down the track. Yes, margins have been sliding at the company but demand for its new technologies such as 3D NAND, DRAM, and 3D X-point surely means that there are better times ahead for Micron. Furthermore, current elevated R&D expense is weighing down margins which again must be taken into account. However, the most serious threat to Micron's future is the supply and demand equation. Astute investors should watch inventory levels every quarter, in the NAND market in particular. Does Micron really have a head start in this area? Will we not see oversupply initially? This is what Micron shareholders will be hoping for.
To sum up, Micron stock has had an incredible run, of late, primarily due to rising NAND & DRAM prices. This alone should boost earnings meaningfully in the fourth quarter and easily beat the conservative guidance already given. DRAM demand should lift Micron in the near term but the real growth story will be about its 3D Nand exploits, where the market feels it has the first mover advantage. Investors mindful of a pullback in equity markets could stay invested in Micron by using a trailing stop loss of 2 to 5% below the current share price.