Micron (NYSE:MU) stock has often been the poster child for the technology trade for the last year or so. This is definitely most true for the chip sector — when it moves, the rest follow.
Last year, when Wall Street sentiment was at its worst, investors sold MU stock down to where its trailing price to earnings ratio fell to 2x. That was ridiculously cheap. At the time, sellers had their reasons to do so. Meanwhile, I sold puts against their fears to generate income.
But today, there is a longer-term opportunity for the stock into year-end.
This year, things are much different than in 2018. MU stock came into its earnings event up 26% year-to-date. It is even outperforming the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) which is lagging 6 points behind. The clear champion still remains Advanced Micro Devices (NASDAQ:AMD) especially after headlines sent it soaring this week.
MU Stock After Earnings
Last night, Micron report earnings and the stock is up over 6% this morning. Going into the event, investors were bracing for the worst. The industry has yet to shake the meme that they have serious inventory and pricing pressure. Maybe this negative notion will start dying this week.
Management reported a decent quarter where they beat both the top and bottom lines. The expectations were low enough that they did not disappoint traders from what was already a bad setup. Investors ignored the big sequential drop in revenues.
The CEO recognized that the environment is indeed difficult but also reassured them that MU stock is executing well on plans and that things will start to improve in the second half of 2019, including the average selling prices of DRAM. This is the proverbial light at the end of the tunnel, and therein lies the opportunity.
I trust that management knows its business best, and I bet that in the long term, there is more upside potential than downside risk. The globe is aggressively migrating toward everything being electronic, so the demand on technology products and services will continue to increase exponentially. MU and the rest of the gang will have enough business to feed their stock growth for years to come, starting this year. After all aren’t we all agog over the advents of Artificial Intelligence, 5G and autonomous driving?
For those who want to own MU for the long-term returns, this is as good a place to enter as any. The stock has momentum and the company just told us that things are going to improve into the year end.
But even those who prefer to actively trade it for the shorter-term profits have an opportunity unfolding here.
Going into the earnings, Micron stock’s short-term range had tightened into a point. This energy needs to disperse, and that usually results in a big move. If the bulls can hold their greens this week then they could target $44 per share.
This will be an area of resistance. However $44 is can also be the neckline for a second buy program that would target $52 per share. This would closed the open gap from last September. There will be more resistance zones along the way, like between $46 and $47 per share, but if the stock market in general continues higher, MU has a good chance at sustaining the rally.
In short, the CEO told Wall Street that the DRAM crash is almost over and that the chip demand growth is going to improve. So even though Micron stock often falls out of favor, according to management, this time the upside potential is greater than the downside risk.
Perhaps the bears got too comfortable shorting this cheap chip stock and will soon be caught in a squeeze. Cheap valuation and strong fundamentals will prevail in the long run.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
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