Micron Technologies (MU) stock has been gaining momentum for some time, as some analysts believe chip demand will rally in the near term. Recent trade developments have also spiked optimism among semiconductor companies, which are highly sensitive to trade tensions. Micron stock is up 2.88% as of 11:01 AM ET today. The stock has also hit its 52-week high of $50.00. Yesterday, Micron closed marginally up by 0.53% at $49.39.
Micron stock has generated stellar returns YTD (year-to-date). The stock has gained 55.7% YTD and has also primarily outperformed most of its peers and the broader market. Micron’s peers NVIDIA (NVDA), Intel (INTC), and Qualcomm (QCOM) have returned 37.5%, 12.6%, and 41.2%, respectively, this year. The VanEck Vectors Semiconductor ETF (SMH) is up 37.8% YTD as of September 10.
So, should you buy Micron stock right now? Let’s try to understand the trend in the market, the stock’s driving factors, and the other metrics affecting it.
DRAM and NAND memory chips
Micron is leading the DRAM (dynamic random-access memory) and NAND (negative-AND) memory chip market. While DRAM chips are found in desktop computers and servers, NAND chips are used in mobile phones and solid-state hard drives. DRAM accounts for roughly 70% of Micron’s revenue.
However, since last year, Micron has been suffering from a slowdown in demand for memory chips at various levels. Lower demand from smartphone companies (especially Apple), as well as the server market, has severely affected Micron. The crypto bubble burst and Intel’s CPU supply shortage issues have also piled up its inventory. Amid lower demand and excess inventory, Micron and other chip makers also stopped their chip production. A fall in demand has thereby led to lower memory prices, reducing Micron’s profits.
Impact of the trade war on Micron stock
The Huawei trade ban also added excess inventory and hampered the process of balancing demand-supply memory prices. Huawei is a critical customer for chip makers. In 2018, Qualcomm, Micron, and Intel generated around $11 billion in revenue from selling components to Huawei alone, according to Reuters. Huawei also added nearly 13% of Micron’s revenue in the first half of fiscal 2019. According to DRAMeXchange, the accelerated Huawei trade ban could further erode DRAM prices.
However, the expectation of a trade deal in October has raised hopes that President Donald Trump might lift the trade ban on US companies’ selling to Huawei. A trade truce is critical, as China is the biggest market for chip makers. On Wednesday, China’s Ministry of Finance also announced that it would exempt 16 types of US goods from additional tariffs. The news has increased optimism among investors. US stock market futures have also gained.
Analysts expect a memory chip rebound
According to some analysts, the demand for memory chips should improve next year. In July, Deutsche Bank maintained its positive stance on Micron and said it expected the stock to see an “upturn” in the near term. Deutsche Bank analyst Sidney Ho also raised the price target on Micron to $55 and reiterated its “buy” rating. He said, “The risks of further negative estimate revision seem less likely,” adding that the stock should now rally from its current level.
Goldman Sachs analyst Mark Delaney also expects demand and supply for memory chips to improve in the near term. Yesterday, a KeyBanc analyst also bet on the stock owing to a recovery in memory chip demand through 2020. KeyBanc analyst Weston Twigg has also raised the price target on Micron to $58 from $45 and maintained an “overweight” rating.
Micron’s outlook is positive
Micron is also seeing improvements in the prices of its chips as of late. During the third quarter of fiscal 2019, the selling price of its chips improved marginally, benefiting from inventory improvements. Though DRAM and NAND selling prices fell 20% and 15%, respectively, in the quarter, the falls were narrower than the second quarter’s falls of 22% and 25%, respectively.
Given the positive trend, Micron expects the DRAM market to return to marginal growth in the second half of this year. It also expects the NAND market to stabilize in the latter half of 2019. Twigg also expects inventories to reduce for both NAND and DRAM in the second half of the year.
Micron’s stock valuation
Micron stock is currently trading at a PE ratio of 5.8x. In comparison, peers Intel, NVIDIA, AMD are trading at PE ratios of 12.1x, 47.9x, and 160.70x, respectively. Though Micron seems compelling right now, its EPS growth rate is expected to fall 47.9% and 58.2%, respectively, in fiscal 2019 and fiscal 2020. However, we expect it to see growth momentum after 2020 owing to an improvement in memory chip prices.
Analysts’ recommendations for Micron stock
Analysts mostly have “buy” ratings on Micron stock. Among 34 analysts, 62% give it “buy” ratings, 29% give it “holds,” and only 9% give it “sells.” Currently, analysts’ 12-month target price for Micron stands at $49.36. On September 10, the stock was trading at a premium of 0.06% to analysts’ 12-month target price.
Micron’s technical levels
Micron’s 14-day RSI (relative strength index) score is 68.09, which indicates that investors are buying the stock. An RSI level of above 70 shows that a stock is in “overbought” territory.
On September 10, Micron stock closed near its Bollinger Band upper-range level of $49.69, suggesting that it’s been overbought.
The technical indicators show that Micron stock is already overbought. However, we believe the stock has further upside potential. Expectations of a turnaround in memory chip demand and trade deal hopes should favor Micron stock in the near term.