Memory market in a cyclical downturn
The memory chip market was hit by a cyclical downturn in the second half of 2018 as DRAM (dynamic random-access memory) and NAND (negative AND) markets became oversupplied. The oversupply situation worsened in the fourth quarter of 2018 due to a slowdown in overall semiconductor demand and higher-than-expected memory chip inventory among customers anticipating rising prices.
Memory stocks react to oversupply
Oversupply in the memory market is affecting the earnings of memory chip suppliers Samsung (SSNLF), Micron Technology (MU), and Western Digital (WDC). MU and WDC fell 40% and 50% in the second half of 2018, respectively. Micron’s stock recovered slightly in 2019, growing 6% year-to-date as some Wall Street analysts upgraded the stock on the back of its strong fundamentals and cost cutting.
Analysts optimistic on Micron stated that its earnings will fall further in the first half of 2019 but that the company would remain profitable with positive free cash flow even in the worst demand-and-supply scenarios. They expect that the memory downcycle will end in the second half of 2019 as new PCs and smartphones hit the market.
On January 14, Micron announced that it’s acquiring its Flash Technologies joint venture with Intel (INTC) for $1.5 billion. On the same day, Evercore ISI analyst C.J. Muse downgraded NAND chip maker Western Digital, which is lagging behind competitors. He even raised doubts about the sustainability of Western Digital’s $2 dividend. This news sent Western Digital and Micron’s stocks down 4.9% and 3.7%, respectively, on January 14.
Micron’s stock could see further downside as its earnings fall further. However, its free cash flow is likely to remain positive in the downtrend because of the cost competitiveness it has achieved by accelerating its transition to advanced technologies during the memory uptrend.
Overall, Micron is better-positioned to handle the current industry downtrend and set for significant growth in the next memory uptrend. Micron’s current low valuation and future growth potential make it a good buy for long-term investors.
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