For those of you too young to know, the phrase "Jump The Shark" is derived from a scene in the fifth season premiere episode of the American TV series Happy Days. In the episode, the central characters visit Los Angeles, where a water-skiing Fonzie wearing swim trunks and his trademark leather jacket jumps over a shark. This marked the beginning of the end of the series popularity. It lasted five more years before being canceled but never once achieved hirer ratings since the fateful "Jumping The Shark" episode. I believe this may be the case for Micron (NASDAQ:MU) going forward.
(Chart provided by Finviz.com)
I took a lot of heat from Micron longs last week based on my recent article warning that this earnings announcement could be a sell the news event for the stock. In fact, that is exactly what is happening as we speak. In the following sections I will detail my top three reasons for the sell off and my prognosis on the stock going forward.
Parabolic Trends Are Always Unsustainable
A parabolic buying trend occurs when a stock experiences a swift price upsurge such as the case in Micron. When you review the chart, you see the price creates a parabolic design moving up 157% over the last year.
(Chart provided by Scottrade.com)
The speedy escalation is characterized by greed and jubilation. Investors are mesmerized by prices increasing so rapidly in a short time. The greed is rampant and contagious, driving more investors to pile in. Those left out hear of the gains and throw more money into the stock hoping to make a fast profit, exacerbating the issue.
Nevertheless, the parabolic move is unsustainable and inevitably breaks down. When the party is over, it's not unusual to see a stock lose the entire gain in a matter of weeks. I am not saying I believe Micron will be down 50% in the next few weeks. Nevertheless, I posit the stock is at least due for a pullback of some magnitude prior to any thrust higher. An at least 10% correction is necessary in the stock to eliminate the froth.
Past performance is not an indicator of future results
You hear this mantra all the time when referring to stocks. The point is that earnings are a lagging indicator, not a leading indicator. Sure, Micron drubbed earnings estimates by a handy margin the past quarter. Yet, all that does is cause analysts to up their estimates for next quarter. As analysts raise the bar, it becomes harder and harder for the company to successfully exceed them. Think of a high jump contest as an analogy. At some point no one can get over the bar.
A second issue in this regard is the historical comparisons become harder and harder to beat. Now that the company has achieved such a great quarter, the next quarter needs to be even better. The company can no longer simply beat expectations by a narrow margin. Micron will have to greatly exceed expectations with solid growth for the stock to continue higher. These factors must be taken into consideration. A stock's performance after earnings is not about the raw data, it is based on whether the company exceeds expectations and by how much. At some point it becomes a losing proposition.
The paradigm shift from cyclicality remains to be proven
As shown in the 10-year chart below of the iShares PHLX Semiconductor ETF (NASDAQ:SOXX) you can see the historically cyclical nature of the industry.
(Chart provided by CNBC.com)
Further, it shows there have been no major pullbacks recently. Many believe this is based on the fact that there will be unending demand for chips as more devices needing them are brought to market. Another big positive cited by proponents of this theory is that we have ventured into a new paradigm where these products will no longer be valued as a commodity due to Micron cornering the market. This gives Micron the ability to control capacity and therefore price. Nonetheless, history has shown major changes to the DRAM supply demand equation have been fatal for Micron's margins and therefore the stock's performance. The DRAM segment accounts for 68% of Micron's business currently. I am not buying the fact things will be different this time. Competition will remain a factor from the likes of Samsung and others. Only time will tell who is correct in this regard.
On the other hand
Micron exceeded expectations
Micron did exceed earnings expectations on April 3rd. This may be a precursor to more earnings beats in the future. If the company can continue to execute and exceed elevated expectations, there is definitely more upside to come.
A paradigm shift has occurred
The semiconductor sector has always been subject to the inevitable supply and demand peaks and valleys associated with commoditized products. If this paradigm has truly shifted, this will benefit Micron's to no end.
Micron is a great company firing on all cylinders currently. The issue is I believe the stock has gotten ahead of itself. A solid 10% pullback would be healthy for the stock at this juncture. Furthermore, if the theory of a paradigm shift to a secular growth story for the semiconductor industry does not pan out, Micron could see a huge hit to its bottom line. Finally, the entire tech sector has been under pressure with the high flyers taking the brunt of it. The Nasdaq is currently trading at six week lows and down over two percent as of the time of this writing on April 4th. This does not bode well for the sector in general.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.