Micron…A Value Play, But More Downside Risk Ahead First
Micron has not missed quarterly earnings estimates since 2015, but guidance continues to be the story due to near-term demand showing evidence of clear weakness. And this quarter was no different. Micron reported yesterday and beat top and bottom line estimates. However, the CEO Sanjay Mehrotra said Micron’s profitability will take a hit from the latest round of U.S. tariffs on Chinese imports, but expect to smooth out the impact over the next 9-12 months.
Wall Street concurs with the headwinds ahead and thinks lower than expected memory chip demand and the continued trade will drag down earnings in subsequent quarters. From an evaluation standpoint it a screaming buy right now with a P/E of 4, relative to Nvidia’s P/E of 58 and Broadcom’s P/E of 11.
Micron also has some great things going for themselves. Lets talk about the two mega trends right now:
Autonomous Cars
Companies are ramping up their autonomous driving efforts, but there is a shortage of flash memory. Self-driving cars have to quickly make massive calculations, then process the that information in order to drive themselves. In fact, it is estimated that each autonomous car will generate 1 GB of data per second, which will either be sent to the cloud for processing or be processed in the vehicle. Micron holds the #1 market-share in the automotive sector.
Internet Of Things (IoT)
The IoT market is expected to grow at a ~ 30 - 40% CAGR over the next 5 years. The eventual billions of sensors will have to store and process that data and memory makes this all possible. Again, Micron remains well positioned to be a major player in the space.
Despite these trends, the lack of buying activity and declining earnings, Micron is dropping. And when Micron drops, it drops. Micron has had 9 major drops in its history and 7 of those drops, dropped more than 70% from the high. So when does Micron become a value play worth buying, lets go to the charts.
Based on the monthly chart, although price is bouncing off the 21 EMA at $41 and buyers stepped in at $38, the chart suggest price will go down to $27.
NOTE: the white dash line represents $19 or a 70% drop from the high.
The chart also suggests that one can trade price down to the $27 if price gets back up to $51.
Micron is buy by any metrics but its business is cyclical so valuation is usually lower. I have bought it at 5$ few years ago but I have sold it around 12$. I don't regret doing it dough it went up much higher because I made great profit and I don't hold non dividend stocks, just trading them... You have to follow some rules that you have...
Good stuff.
All in on october 5th calls
Good luck with the trade.
I think Micron are operating in a sector that is only going to continue to grow for the foreseeable future, thus I a maintain a positive long term outlook despite current trading.