Micron: The $10 Floor Cannot Hold For Long

| About: Micron Technology (MU)

Summary

Micron will likely breach the $10 floor in the coming couple of months.

There are no indications of an immediate reversal in declining DRAM prices.

The stock is trading below its Tangible Book Value, but it can fall more.

The above prediction about Micron Technologies (NASDAQ: MU) will enrage the bulls, but the hard truth is that the stock cannot hold the $10 level for long. I am expecting a sharp 20% decline in the price to $8-$8.60 when the support is breached.

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On March 31, I recommended investors to use rallies to reduce their exposure. The stock did rally to $12.41, however, it has been a dismal story since then. The shares are roughly where they were back then, at $10.75. A positive which aided the rally was an upgrade which suggested that the stock had a massive 31% upside with a target price of $14 per share. But, the market knows better, and the stock is plummeting.

One reason why the stock could be respecting the level of $10 is because it is closer to the tangible book value of the company. Some analysts like to view this as a strong indication that the stock has limited downside. But as we have seen in the case of Bank Of America (NYSE: BAC), the stock can drop severely below its TBV. Bank of America currently has a TBV of $16.17 per share while the stock trades at $14.56. Earlier, it was trading at a 20% discount to its TBV. I'm expecting a similar case for Micron, and recommend that investors do not make purchases in haste.

As can be seen from the chart below, Micron's Price to Tangible Book Value is now at 0.948. But for the 15-year period since 2001, there have been several occasions when the ratio has fallen to 0.800, and even below 0.500 during the 2008-2009 financial meltdown. This is not to suggest that the same will be repeated now, but yes, it would be wise to not rule out the possibility that more declines may come. Furthermore, if the opportunity does present itself that the stock drops by 20% or more, it will be an attractive, low-risk long call from a medium-term perspective. Honestly, I'm not sure about the long-term price target of the stock.

There seems to be no end in sight for the decline in DRAM prices. DRAM constitutes approximately 54% of the total revenue. The shift from PCs to mobiles is adversely affecting the demand for DRAMs, and the management cannot do much about it. This is a technological shift, and the company should guide its focus according to the changing times, or perish.

The market also is worried about the expensive $1.25 billion debt offering at 7.5%, which will eat into future earnings. Investors were shocked to see the debt being raised at such a high rate given that there is abundance of cheap capital.

The deteriorating fundamental scenario and the awkward moves by management have pushed the investors to the edge. They are not comfortable right now, and the next negative development will likely cause them to dump their holdings.

Disclosure: I am/we are short MU.

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.