The Dow Jones Industrial Average may have ended on a positive note last week. However, Wednesday’s 800-point drop was perhaps the first major warning of a pending recession. Naturally, semiconductor firms like Micron Technology (NASDAQ:MU), which depend on a robust economy, were under a spotlight. Year-to-date, Micron stock is up over 40%, but many investors fear that could change in a hurry.
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For one thing, the already ugly U.S.-China trade war has escalated in recent weeks. From harsh rhetoric ramping toward accusations of currency manipulation, no resolution to this conflict appears in sight. That’s despite the fact that both sides have demonstrated evidence of economic pain. For instance, key metrics, such as the producer price index, have turned negative on China.
However, new reports indicate that President Donald Trump’s aggressive prosecution against Chinese malfeasance has also hurt American businesses. One confirming point is that consumers are paying more for products or parts imported from China. Ultimately, that doesn’t do the MU stock price any favors as 57% of Micron’s total revenue comes from China.
As a result, conservative investors may want to sit out Micron stock until the smoke clears. But for the risk-tolerant, shares might fare better than many other companies. Here are three reasons why:
Trump Is a Long-Term Benefit for Micron Stock
Undoubtedly, Trump has a tough challenge for the upcoming 2020 election. Primarily, he must hope and pray that the economy rebounds under his watch. Otherwise, he might pay for it with a Democratic victory a little more than a year from now.
Unlike prior administrations, the voting public will show zero mercy for Trump. That’s because a major reason why we’re having economic troubles is due to the trade war. Even if his handling of this conflict is justified — and there are reasons to believe this is the case — voters will nevertheless blame Trump.
That said, the MU stock price is one of the direct beneficiaries of Trump’s no-nonsense economic policy.
Micron knows full well the depths the Chinese will go to steal intellectual property. They were the victims of a complex heist previously only known to Hollywood scripts. Of course, such an environment negatively impacts Micron stock. It’s distracting enough that the company competes in a cutthroat market. Adding government-endorsed espionage takes it to another dimension.
Fortunately, MU executives don’t have to dwell on this scenario any longer. Trump sent a very harsh signal to China that their misconduct won’t be tolerated. Given the economic damage on both sides, I doubt the Chinese are eager to repeat their offenses.
5G Will Support the MU Stock Price Over the Long Run
As I mentioned up top, around 57% of Micron’s total revenue comes through Chinese channels. That’s fine if we have a robust relationship with the world’s second-biggest economy. But in this juncture, it’s almost catastrophic.
So, why hasn’t the MU stock price absolutely plummeted in the wake of the Dow Jones slaughter? In my opinion, a big reason why stakeholders have remained positive is the 5G rollout. This is a game-changer for the wireless industry and Micron plays a pivotal role.
As you know, the company specializes in memory chips. A broader shift to cloud computing, data centers and the digitalization of everything has previously bolstered Micron stock. As an aside, these industries will continue growing despite their present weakness. This dynamic should help mitigate volatility associated with the trade war.
More importantly, Micron is busy developing next-generation chips that feature a substantial boost in memory capacity. Further, these chips will play an integral role in future smartphones, including foldable phones.
You can also expect government support for our big tech industries. Sure, federal oversight agencies aren’t too impressed with this sector right now. However, when we’re locked into a tech cold war, it just doesn’t make sense for our government to punish our best and brightest.
Micron Stock Is Built Like a Tank
The final silver lining in this trade war mess is the financials underlining Micron stock. Here’s the obvious reality about the coming downturn (if we have one): Everyone will suffer.
Initially, that sounds like a terrible thing for MU stock. As a tech firm and a “risk on” name, it’s very sensitive to market pressures. However, Micron is built like a tank relative to other sector players.
For example, the company has a very strong balance sheet that got even stronger with debt paydowns. Its cash position has stayed stable over the last several quarters, holding $6.7 billion at last count. Additionally, Micron enjoys profitability margins that exceed most other semiconductor names.
In other words, if the markets encounter turbulence, MU can weather storms that other rivals can’t. That positions the company to take advantage once the turmoil subsides. Further, with high demand for 5G and other tech, Micron can mitigate some of the risks associated with China.
Having said all this, Micron stock is not for the faint of heart. But if you’re looking for a tech discount, this might fit the bill.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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