Micron Stock to Rally Further on Chip Demand Recovery

Micron Technology (MU) stock has been gaining momentum on optimism of recovery in memory chip demand. During the company’s first-quarter fiscal 2020 (year ending in August) release on December 18, CEO Sanjay Mehrotra forecast a recovery in the second quarter of fiscal 2020.

Micron stock is rising

As of December 20, MU stock had risen for nine days straight. It reached a new 52-week high of $55.93 on Friday, crushing the high attained last Monday. Micron stock closed 0.97% higher on Friday, at $55.06. Its market capitalization was $61 billion. The stock was 1.6% below its 52-week high of $55.93, and 93.9% above its 52-week low of $28.39. As of December 20, Micron stock had returned 73.5% this year.

Micron’s struggles seem to be over

Micron makes DRAM (dynamic random-access memory) and NAND (negative AND) chips. The demand and supply of these chips determine memory prices.

Since last year, Micron had been facing a cyclical downturn, and memory chip has declined significantly due to various reasons. Lower demand from smartphone companies and the server market dented Micron’s operations. The US-China trade war, leading to the Huawei trade ban, also led to a demand-supply imbalance in memory prices. However, the company is now recovering and expects favorable chip demand ahead.

Micron’s revenue is improving

Micron delivered impressive first-quarter results, with its earnings and revenue beating analysts’ estimates. The company’s revenue dropped 34.9% YoY (year-over-year) to $5.14 billion but improved by 5.6% sequentially. Micron’s revenue has improved sequentially in the past two quarters. Chip demand recovered in the fourth quarter as inventory levels improved rapidly.

The company’s second-quarter revenue forecast is lower than analysts’. Micron anticipates its Q2 revenue falling YoY and sequentially to $4.5 billion–$4.8 billion, whereas analysts expect its revenue to fall 19.5% YoY to $4.70 billion. During the company’s earnings call, Mehrotra stated that it would be the “cyclical bottom for our performance,” meaning that Micron stock should rally when the memory chip industry rebounds.

Micron and Huawei licenses

Micron was one of the largest chip suppliers to Chinese telecom giant Huawei, which contributed around 13% of Micron’s sales in the first half of fiscal 2019. However, Micron stopped doing business with Huawei due to a trading ban imposed by Donald Trump.

The export restriction to Huawei has also affected chip giants Qualcomm (QCOM), Broadcom (AVGO), and Intel (INTC). Huawei is a crucial customer for Qualcomm, which earned around 65% of its revenue from China in 2018. Meanwhile, Intel generated about 26.6% of its total revenue from China. And according to Reuters, Qualcomm, Micron, and Intel generated $11 billion in revenue from selling components to Huawei alone in 2018.

On December 18, Micron received licenses to supply some mobile and server chips to Huawei. Bloomberg reports Mehrotra said that permits to trade with Huawei would “enable us to provide support for certain products.” However, the company believes that the process could take some time and will not materially affect its revenue for the next few quarters. In the long term, however, Micron could benefit.

Analysts love Micron stock

Of the 37 Wall Street analysts covering Micron on December 20, 26 suggested “buy,” eight suggested “hold,” and three suggested “sell.” Their average 12-month target price of $62.16 for Micron was 11.4% higher than its December 20 price. Their median target price that day was $65.

After the company’s Q1 release, Deutsche Bank, Citigroup, Wells Fargo, Mizuho, and many others lifted their price targets for its stock. Wedbush and Susquehanna also added to the optimism that memory chip demand is rebounding.

Projected growth for Micron stock

Analysts expect the stock to recover in fiscal 2020 and fiscal 2021, boosted by the favorable chip market. They anticipate Micron’s earnings falling 63.8% YoY in fiscal 2020, versus a 46.9% YoY fall in fiscal 2019. In fiscal 2021, analysts expect Micron’s earnings to rebound and grow over 100%. Meanwhile, they expect its revenue to fall 12.6% YoY in fiscal 2020, outpacing its 22.9% YoY drop in fiscal 2019. However, analysts expect its revenue growth to turn positive in fiscal 2020, to 23.6%.

Reading Micron’s technicals

Micron’s 14-day RSI (relative strength index) score is 73.3, which indicates that the stock is overbought. An RSI score above 70 indicates a stock is in “overbought” territory. Furthermore, on December 20, Micron stock closed near its upper Bollinger Band of $55.24, also suggesting it is overbought.

Micron stock closed at $55.06 on Friday, 12.1%, 15.5%, and 18.3% above its 20-, 50-, and 100-day moving averages, respectively. The stock trading above its moving averages suggests it is trending upward.

All of the stock’s technicals indicate it is overbought. We see Micron as a long-term growth stock, thanks to compelling demand for the company’s memory and storage chips. The company’s investments in AI and autonomous technology should fuel demand for its memory chips. Micron’s focus on 5G wireless technology and the Internet-of-Things should also add to its growth story.