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After increasing over 300% in just two-years, shares of Micron Technology (NASDAQ: MU) have started going in the opposite direction. The stock has become quite the lightning rod.
Bears cite the cyclical nature of memory chips, the declining pricing in NAND chips this year, and the possibility that pricing for DRAM (Micron's primary product type) will decline next. Bulls counter that, even after the dramatic run-up in the stock, Micron's one-year trailing P/E is a mere 3.9, and the company's work to specialize its products will help insulate it from historical swings in sales.
The truth is likely somewhere in between. While Micron does have an industry leading portfolio of digital memory products and has made great strides to maximize profits, a downturn has nevertheless already begun. That doesn't mean the stock isn't a buy, but here's how to approach the situation.
The cycles of memory
Micron and other memory-chip makers have enjoyed a two-year run as a surge in demand and shortfall in supply has led to higher prices for memory chip. That, in turn, has pushed Micron's profits to all-time records. During the recently completed 2018 fiscal year, Micron generated a staggering $14.1 billion in net income on $30.4 billion in revenue.
Micron has certainly done its fair share to help itself along the way. The company has worked to differentiate its product portfolio from competitors, developed new products for emerging technologies in data centers and autonomous vehicles, and reduced production costs. Nevertheless, microchips -- and memory chips in particular -- are subject to sales cycles.
Pricing in NAND and DRAM, the two types of memory chips Micron makes its hay off of, have started to head lower. We can't be sure how low prices will go or how well Micron will weather the storm, but a down cycle is coming nonetheless. Demand has started to cool, prices are moderating, and supply is catching up.
Image source: Getty Images.
It's all about averages
Micron's momentum has continued to carry sales and profits higher despite signs that a downturn is already here. However, in anticipation of the inevitable, Micron's stock has tumbled 34% from its highs, a normal occurrence for a cyclical stock ahead of expected turbulence.
That could seem like a great time to buy, especially with management continuing to talk positively about the company's prospects. Micron is paying down debt and is beginning an aggressive share repurchase program, which should help mitigate some of the looming pain. But Micron investors should still approach with caution.