Micron Technology (MU) Follow-Up
Summary
Last week I penned an analysis on Micron Technology (that I had been meaning to get around to) here; https://thebearishbulls.com/2019/03/04/micron-technology-inc/. Throughout this follow-up, we’ll take a look at how it’s moved over the past week, seeing as I’m under the impression we’re finally seeing news-related movement rather than the upward passive-movement we’ve seen through it’s rise from the sub-$30’s in mid-December to the low $40’s peak over the past month.
In my opinion, the biggest factor that seemingly moves Micron one way or the other (in the short-term) is speculation by the market as to what degree the bearish-case narrative of ‘DRAM-pricing being cyclical’ will play out in actuality along with the side-question of how big of a factor that cyclicality will be to Micron’s operating/profitability margin. So we’ll check out how that issue has played into the past week.
3.4.19-3.8.19
Throughout the past week, Micron’s stock has seen a 7.89% haircut. This compares to a 2.61% drop in the S&P 500, a 2.53% drop in QQQ (tech-focused ETF), & a 4.68% drop in XSD (a semi-conductor-focused ETF).
On the news-front, there’s been plenty of bearish speculation related to DRAM-pricing. Seemingly, the reemergence of the bearish narrative stemmed largely from a lone press release.
On Tuesday (Mar 5th), TrendForce (a research firm on the tech industry) issued a press release on 1st Quarter DRAM pricing. These reports can be insightful for the average individual as they can relay ‘real-time’ results between quarterly reports by companies. This can give us an idea of what is going on in the market between quarterly reports rather than being left in the dark on these issues until our favorite company’s next quarterly reports. However, it should probably be noted that a beneficial procedure would be to note these releases as an input variable, per se, but not as the sole input to decision-making. Within the press release, TrendForce states a few insightful points. In accordance with their latest analysis, “DRAMeXchange finds most contracts are now monthly deals rather than quarterly deals, with February seeing an unusual, large down-correction in prices.” Followed by, “The current quarterly decline dropped from the originally projected 25% to nearly 30%, resulting in the sharpest decline in a single season since 2011.” I think we found where the majority of analysts discovered the numbers behind their Q219 DRAM-Pricing revisions. Additionally, it’s noted that “inventory levels have kept climbing since contract prices dropped in the 4th quarter of 2018, and most DRAM suppliers currently holding around a whopping six weeks’ worth of inventory.” In mapping out Micron’s Inventory Turnover Ratio (% of inventory they sold throughout each quarter), there does appear to be a slight downturn occurring over the past year:
So, this concern could very well apply to Micron as well, however managements awareness of this concern in the most recent quarterly report relieves some concern for me as to if this can develop into being a causation of a surprising ‘miss’. Though, as I highlighted in my previous article on Micron, I’m under the impression the key players of the management team are proactively smart. So that could very well add some bias into my own speculations. Lastly on this point, if Micron were to be holding ~6 weeks of inventory throughout the quarter, that turnover ratio would be roughly 0.46, so as one can see, we were a ways off from that this past quarter. I’ll make sure to follow up on this post Micron’s earnings on 3/20/19 & we’ll have a better idea of the velocity that Micron’s Inventory Turnover is moving.
On the news-front, much of the bearish narrative on DRAM-pricing by the big financial news names came running to the front-lines to reiterate the message throughout the remainder of the week. Many of these articles quoted directly or reiterated in one form or another the news highlighted in TrendForce’s press release. Over the past week, I counted roughly 8 articles released by the big financial news names that were focused on the DRAM-pricing narrative. For comparison sake, the previous week (2/25/19-3/1/19), saw no bearish articles by the big names, there was a lull of news related to DRAM-pricing. Additionally, throughout that same previous week, I noticed a multitude of bullish articles on Micron’s potential & the market in general. This seemingly paints a picture to me of the growing bullish sentiment that underlies Micron’s stock, but that’s backed into hiding temporarily when the bearish sentiment comes flying back to the forefront on new DRAM-pricing news.
Lastly, the cyclical nature of the DRAM market is nothing new. The bearish sentiment of DRAM-pricing has been present in part since 2015-2016 for Micron. I’m under the impression that this cyclicality is, for the most part, priced-in. Hence Micron’s P/E relative to competitors. The important news and question for us, is to what degree will the actual volatility of DRAM’s pricing-cyclicality compare to the speculated volatility of DRAM’s pricing-cyclicality?
Priced-In?
As I referenced above, Micron’s stock (MU) is trading at a ~3.2x P/E compared to Western Digital’s (WDC) ~16x P/E & Seagate’s (STX) ~6.75x P/E. Throughout much of 2018, as I watched Micron’s stock, it became apparent to me that DRAM’s cyclical-nature and utilizing it as a focal-point for a bearish-case on MU was a notable variable into the downward pressure on Micron’s stock as the company’s financial position continued to improve. In early June 2018, MU peaked around $64.50 per share. Throughout the remainder of 2018, the stock dropped ~50% down to it’s low of roughly $28.40 per share. Throughout this time, the fear of the ‘DRAM-Cyclicality’ was reiterated again & again. However, the results each quarter continued to improve across many fronts. I speculate that this ~50% decline, largely on DRAM-cyclicality fears, while it hadn’t come to fruition yet, was essentially a form of the market ‘pricing-in’ DRAM-cyclicality, as the market kept assuming the results of DRAM-Cyclicality was ‘right around the corner’.
Following this 50% decline, MU bottomed at ~$28.40 on December 20th 2018, shortly after their Q119 earnings report on December 18th. Subsequently, it rebounded ~48% to ~$43 per share on February 26th.
On not much aside from speculation, I think it’s apparent a near-50% rally was a bit overdone, the stock was bound to revert back a bit. I’d argue that need for a reversion is another variable that played into this past week for Micron. However, at the same time, I’d argue that around $40 per share is where I’d see MU mostly fairly-priced when we attempt to factor in the bearish-speculation aspect. This argument against movement based largely on speculation could also be applied to the downtrend Micron’s stock saw throughout 2018. The 50% downtrend based mostly on DRAM-Cyclicality speculation led to an oversold stock that was bound to rebound a bit. However, as this cyclicality becomes priced into Micron’s stock ahead of their earnings on the 20th, it will (in my opinion) alleviate a notable amount of the downside risk one could attribute to DRAM-Cyclicality fears. That is, unless, the actuality behind DRAM-Cyclicality is more significant on Micron’s results than is speculated by the market currently. However, if the actuality behind DRAM-Cyclicality is less significant on Micron’s results than is currently speculated by the market, one could argue the stock will be oversold if the stock ends up near it’s $30 previous bottom prior to earnings.
Conclusion
The bearish-narrative of DRAM-Cyclicality came roaring back to the forefront of Micron news over this past week, causing a 7.89% drop for their stock. Much of the reasoning behind this bearish reemergence being a press release by TrendForce on DRAM-pricing analysis on current market conditions. However, this DRAM-Cyclicality concern is old news, with this sentiment and speculation being a large factor towards MU’s 50% decline throughout 2018 and leading to it’s current 3.2x P/E. However, in the midst of these notable reversions, it’s important to note the medium- and long-term trends underlying these names. The medium to long-term bullish sentiment underlying the stock has been a notable factor in the ~50% rally MU has seen since the stock bottomed in mid-December. Additionally, movements based largely on speculation are bound to face short-term reversions inevitably. With those inevitable reversions being occurring sooner rather than later in the majority of cases. If Micron sees more downward pressure ahead of earnings on March 20th, without coinciding news to validate the selling, an argument could certainly be made on the concerns surrounding DRAM-Cyclicality is largely priced-in. With the DRAM-Cyclicality being priced-in and improved financial results quarter after quarter this past year, one could certainly argue much of the down-side risk would be priced-in with that DRAM-Cyclicality. To conclude, the question to keep an eye on in the coming months is, “How will the actual volatility of DRAM-Cyclicality compare to the speculated volatility of DRAM-Cyclicality?”
Until next time,
ZSV
Disclaimers
This report is provided for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell an interested in any securities.