Is It the Beginning of a New Cycle for Micron Stock?

Micron Technology Inc. (NASDAQ: MU | MU Price Prediction) stock has been an absolute winner on Wall Street over the past year. Even with the recent market downturn due to coronavirus outbreak concerns, this chip stock is still up over 28%. Supply chain concerns may affect the stock (or at least they have recently), but with a dominant position in the memory chip market, Micron most likely will come out of this as a leader.

Technology stocks have been some of the worst hurt in last week’s correction, but as the stock market is beginning to improve, these stocks could have the most to gain, the semiconductor sector in particular.

The VanEck Vectors Semiconductor ETF (NYSEARCA: SMH) saw a loss of 9% last week, but this was a little less than what the Dow Jones industrial average and S&P 500 saw. The VanEck Semiconductor ETF had a gain of 64% over the course of 2019, vastly outpacing the broad markets, which were up nearly 30%. Outpacing all of these was Micron Technology stock, up about 68%.

What Does 2020 Have in Store?

While 2019 was a particularly strong year for semiconductors, and Micron specifically, the same trends look to be the prevailing tailwinds now.

The good news is that demand will continue to be driven by manufacturers focused on putting intelligence into every imaginable device. Artificial intelligence (AI), machine learning and self-driving vehicles remain hot areas for development. All require processing power and memory chips. That last is where Micron enters the picture.

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On the other hand, revenues and profits were constrained last year, and it’s not clear that the situation will improve this year. For Micron, and the industry at large, an inventory glut in dynamic random access memory (DRAM) and NAND flash memory products has stifled sales.

Note that DRAM chips are used in varying amounts in virtually every desktop PC, laptop and server. NAND flash memory is used in smaller devices, like thumb drives, cameras and smartphones, where its large storage capacity and ability to write and erase data quickly is a significant benefit. Solid-state drives are also big consumers of NAND flash.

The next round of quarterly results is due later this month. Analysts are calling for $0.36 in earnings per share and $4.69 billion in revenue for the fiscal second quarter. Last year’s numbers were $1.71 per share on the bottom line and $5.84 billion on the top line.

Micron previously projected fiscal second-quarter adjusted EPS in the range of $0.29 to $0.41 on revenues between $4.5 billion and $4.8 billion.

End of the Cycle?

When the most recent earnings report came out, President and CEO Sanjay Mehrotra suggested that the memory-chip industry was at the end, or bottom, of a cycle. In his own words:

With our strong execution and improving industry conditions, we are optimistic that Micron’s fiscal second quarter will be the cyclical bottom for our financial performance.

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On the conference call for the fiscal first quarter, Mehrotra expanded on his thoughts:

Our base-case assumption, on which all our projections are based, assumes that there are no perturbations to the demand environment due to macroeconomic conditions or trade-related developments. In DRAM, there has been a strong recovery in the second half of calendar 2019, and our view of calendar 2019 industry-bit demand growth has increased to approximately 20%.

[C]alendar 2020 industry-bit supply [is expected] to be lower than industry-bit demand as a result of industry capex reductions, and consequently we expect the industry environment to improve through calendar 2020.

With all this in play, and the worst of this correction seemingly in the rearview, Mehrotra makes a good case for Micron stock to retake its highs and then some.

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