Semiconductor stocks are starting to lose their sparkle as 2017 draws to a close. After a market-beating performance all year long, it probably shouldn’t come as a surprise. That said, Micron Technology, Inc. (NASDAQ:MU) hasn’t proven immune to the general turn in sentiment, as the MU stock price has dipped sharply from $50 to $42 in recent trading sessions.
At the end of October, I warned that Micron stock is ripe for profit-taking. MU stock had one more pop left in store for it in November, but shares then dropped 20% following the Thanksgiving holiday.
Interestingly, given the huge moves, you’d expect some big Micron Technology news to be breaking. To be clear, there is some Micron-specific news, but at this point, MU stock is largely captive to its sector’s performance.
The hottest semiconductor stock of the year, Nvidia Corporation (NASDAQ:NVDA), has gone into reverse lately. NVDA stock peaked the day after Thanksgiving at $216. Over the next five trading sessions, speculators ripped into NVDA stock, plunging it down to $187. The tide has hardly let up since then. Shares hit new closing lows Wednesday.
Not surprisingly, the rest of the sector has dropped in sympathy. Advanced Micro Devices, Inc. (NASDAQ:AMD) recently broke below $10 for the first time since May. And so on across the industry. MU stock went right with it.
The Republican tax package has a lot to do with the selloff. The tax package provides the most benefit for companies that have high effective tax rates and low PE ratios. Tech companies aren’t, generally, in those categories, and thus investors were busy banging the sell button on the sector once the Senate tax package passed.
Now, the effect on MU stock shouldn’t be all bad. Micron, as of Aug. 31, has more than $1.2 billion in offshore cash which it hasn’t been able to repatriate. Those funds should free up a lot of balance-sheet flexibility for Micron going forward.
As of the same filing, Micron had almost $4 billion in accumulated deferred American-domicile tax losses. Those are left over from past years when Micron lost large sums of money. As a result, the cut in corporate taxes will do little for Micron’s taxation in the near term as long as they continue to have past losses which they can use to offset earnings.
So, in all, the tax bill does some good for Micron but hardly enough to separate it from a sector that’s sold off on the news.
Dueling Memory Market Outlooks
Arguably the biggest development for MU stock specifically over the past month are analysts’ diverging views for the memory market in 2018. Two weeks ago, a Morgan Stanley analyst downgraded competitor Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM).
The reasoning for this applies to Micron as well. Morgan Stanley suggested that NAND memory prices are heading downward this quarter, and that DRAM pricing trends are unclear beyond the first quarter of 2018.
Mysteriously, however, Morgan Stanley upped its price target for Micron stock rather dramatically at the same time it doused cold water on the company’s main product markets. Micron stock sold off following the mixed messages out of Morgan.
Following Morgan’s report, an analyst at Stifel chimed in, defending Micron specifically. Stifel’s view is that DRAM pricing will remain strong, and that even NAND may not turn out as negatively as Morgan Stanley suggested.
Susquehanna added to the bullish analyst opinion this week. Their analyst team stated that:
“Cloud demand is expected to remain a key secular trend in ’18 with ripple effects across the entire storage/memory supply chain […] Data growth, and rapid migration of workloads from on-prem environments to public cloud, is not expected to abate, and we favor Micron and Western Digital Corp (NASDAQ:WDC) as our top component names expected to benefit from cloud demand.”
Bottom Line on MU Stock
The last time Micron stock traded at this level, I suggested profit-taking would soon be coming. Instead, the stock rallied, and then the correction hit. We’re back at the same Micron stock price as six weeks ago after the recent gyrations. Now, instead, the question is: Buy the dip or not?
Fellow contributor Vince Martin makes a strong case for Micron stock being too cheap here. He argues that Micron should be priced at 15x smoothed Micron earnings of $4-5/share, which gets you a stock price up into the $60s.
He makes a great point on the cyclical nature of Micron’s earnings. Just as it is unreasonable to expect Micron’s $6+ forward earnings to recur indefinitely, neither should investors dump the stock on any down earnings years.
That said, Micron remains a cyclical stock, and I don’t trust investors to approach the situation unemotionally. Particularly since Micron is fairly heavily indebted. It has almost $10 billion in long-term loans, a figure that has doubled in recent years. Combined with Micron’s lack of a dividend, and there isn’t much to shelter investors the next time memory cycles turn downward.
I see no indications that the sky is about to cave in on the memory producers or Micron in particular. That said, there’s good reason to think we’re a lot closer to peak Micron earnings than we are to another big move higher.
The recent tax-related dip offers a chance for nimble traders to make some quick bucks. But I’d steer clear of shares for much more than perhaps a play into this quarter’s earnings report which drops next week.
At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
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