Micron—A highly cyclical stock
In this series, we saw that Micron Technology (MU) emerged from its losses in fiscal 2H16 after DRAM (dynamic random access memory) prices started to increase in June 2016. Micron Technology is a pure-play memory manufacturer, and its earnings and stock prices are directly proportional to the highly volatile DRAM prices. This makes Micron Technology a highly cyclical stock, as opposed to a company like Intel (INTC).
Micron’s stock price movement
Micron Technology (MU) stock went on a roller coaster ride in 2013 and 2014 when DRAM prices were high. During these two years, its stock price rose 400% from $6.96 on January 1, 2013, to $34.75 on December 29, 2014.
This gain faded significantly in 2015 and the first half of 2016 as the stock fell 72% to $9.63 on May 12, 2016. During this timeframe, the DRAM market was hit by oversupply as Samsung (SSNLF) and SK Hynix increased their DRAM output levels significantly while demand fell.
Micron Technology stock regained momentum in June 2016 as the DRAM oversupply situation corrected, resulting in increasing DRAM prices. The stock’s price has doubled since June 1, 2016, and is currently trading above $26.
Analysts’ price target for Micron
Wall Street analysts have a consensus price target of $31 for Micron Technology (MU) stock, which it may achieve if it reports better-than-expected guidance for 3Q17. Analysts also have a bullish target of $45, which it can achieve if the memory market environment continues to remain favorable for Micron Technology in 2017 and 2018. If the stock achieves this target, it could reach its highest peak in its history.
Sell-side analysts’ views
Some sell-side analysts are warning that the memory industry is “late in the cycle,” which indicates that overcapacity is not far away and could push prices down. The analysts referred to the order book of semiconductor equipment vendors, which showed 27% YoY (year-over-year) growth in NAND equipment in 2016 and even stronger growth in 2017.
Historical trends show these high orders convert into new capacity in one to two years. The higher capacity overwhelms demand at some point and creates a situation of oversupply, washing away memory manufacturers’ profits.
The trend is slightly different this time. A major portion of the NAND equipment orders came from Chinese (FXI) fabrication facilities, or fabs, which do not have the intellectual property. It could take these fabs years to develop 3D NAND from scratch, which would increase their production costs.
Moreover, the memory market is diversifying into various end markets. It is transitioning from commodity chips to custom chips, all of which reduce demand volatility.