Much digital ink has been spilled discussing whether Micron Technology Inc. (MU, Financial) has become a value play over the last six months. The stock entered a downward slide in the summer of 2018 as memory prices began to decline. It bottomed out during the December slump and, since then, has been buoyed up on the back of the overall market recovery.
Currently, the stock is trading around $38 per share and is priced relatively cheaply based on metrics like price-book and price-earnings. However, there may be serious fundamental reasons why the stock will decline further.
Cheap or risky?
By many measures, Micron is cheap. It is currently trading at a price-earnings ratio of just 3.13. Price-book is just 1.37. Both of these metrics are below historical levels, but expectations for the near future are also low. The consensus earnings per share estimate for this year is $7.65, a significant decrease from the $11.95 it posted for the previous year. Why the drop in earnings?
The main reason shares of Micron have declined from their 2018 highs is a collapse in the price of DRAM and NAND flash memory due to a global oversupply. Despite being a complex technological product, both behave like commodities, with cyclical over- and undersupply causing corresponding cycles in the share prices of companies like Micron. The last such cycle saw the company's share price bottom out at around $10 in April 2016, before going on a two-year bull run which saw the price peak at around $60.
So where is the flash memory market heading in the near future? According to DRAMeXchange, a leading flash memory industry website, the first quarter of 2019 has seen the biggest single-quarter fall in prices since 2011, with declines of up to 30% expected. Micron's management previously indicated they expected a fall in the first half of 2019, though whether they anticipated this extreme a fall is unlikely. Moreover, by their own estimate, they expect financial performance to pick up in the second half of the year. The latest collapse in price, however, suggests this may not come to pass.
There are other big-picture problems facing Micron. The weaker demand for mobile devices has had a knock-on effect for chip companies. The ongoing U.S.-China trade war has weakened demand in China, which has also hurt the company.
Summary
All in all, there are a number of reasons why Micron’s cheap valuation may be justified. The fact we are currently on the downswing in the flash memory cycle, coupled with weakening demand for the end users of Micron’s products, presents management with many thorny problems. The next earnings report, which comes out March 20, will be very illuminating. It should show the extent to which the company has been harmed by the decline in prices, and whether management is still optimistic about the second half of 2019. Until then, it is best to stay put and watch this particular stock.
Disclosure: The author owns no stocks mentioned.
Read more here:
