Micron: The Silver Lining

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About: Micron Technology Inc. (MU)
by: Business Quant
Summary

Short interest in Micron Technology hasn't risen in spite of all the bearish reports coming out of late, suggesting that its profitability is in jeopardy.

Interestingly, institutional investors have actually bought Micron stock in the last reporting cycle.

Long-term investors should remain patient and consider buying Micron stock if they fall further going forward.

Micron (MU) has been surrounded by bearish market sentiment due to a myriad of reasons – including escalating trade war tensions between the U.S and China, and softening ASPs for both NAND and DRAM – and its shares have plunged by about 45% from their 52-week highs as a result. But in spite of all skepticism surrounding Micron's prospects, the latest short interest data publication suggests that market participants aren’t actively shorting the chipmaker’s stock and that the decline in its share price was perhaps merely the outcome of weak hands offloading their positions. Let’s take a closer look.

(Source: Bigstockphoto, Image license purchased by author)

Shorting Activity

Let me start by saying that short interest is essentially the aggregate number of short positions against a particular stock that are open, and are yet to be covered. A sharp rise in the metric generally indicates that market participants are betting on a particular stock to fall going forward. Conversely, a sharp decline in the metric would suggest that the Street is growing neutral or bullish on the name.

Now coming back to Micron Technology, the chipmaker’s prospects are being heavily scrutinized of late on the back of escalating trade-related tensions between the U.S and China and the consistent fall in DRAM and NAND selling prices across the board. In fact, there have been reports suggesting that softening contract prices could hurt the profitability of DRAM manufacturers for the next two quarters. In light of this bearish-market sentiment, one might expect short interest in Micron to spike. But that hasn’t happened at all..

Chart
MU Percent of Float Short data by YCharts

The chart attached above would indicate that short interest in Micron, as a percentage of its overall shares outstanding, is actually hovering near its 10-year lows. This doesn’t, by any means, suggest that the broad swath of market participants is growing bearish on the chipmaker. In fact, comparing Micron’s short interest with that of other semiconductor firms corroborates my thesis that Micron is thinly shorted.

(Data from YCharts, Compiled by Author)

Note that the latest short interest data was published only last week, with a cutoff date of November 15, so it factors-in the impact of U.S-regulators imposing an export ban on China’s Fujian Jinhua Integrated Circuit Company. But I understand that looking at just one metric can often times provide false positives.

So, I pulled out borrowing fees for various semiconductor stocks. Interactive Brokers updates this dataset on a daily basis and it essentially reveals which scrips are in huge demand amongst shorting circles. For example, if a broad swath of market participants initiates short positions in a particular stock, then the cost of borrowing that stock would tend to spike up.

Fee Rate from Interactive Brokers

(Source: Interactive Brokers)

In the case of Micron Technology, it’s evident that the cost of borrowing its shares is in-line with its historical levels and also that its borrowing fee is lower than other mentioned semiconductor stocks. All this leads me to suggest that market participants aren’t actively shorting Micron stock.

Why is This Happening?

Well, for starters, DRAM and NAND spot prices have fallen quite a bit over the past few quarters. I have a scraper (found here and updated daily) in place which highlights that spot prices have plunged across the board. Some analysts have noted that ASPs could fall further, so that might actually translate into a legitimate threat to Micron’s growth story for the coming months.

(Source: BusinessQuant.com)

Also, the escalating trade-related tensions between the U.S and China can potentially limit Micron’s growth. The chart attached below indicates that the chipmaker generates about 51% of its overall revenue from China and about 14% from the U.S. Naturally, any supply related hiccups caused by tariffs imposed by either countries can meaningfully hurt Micron’s revenue and profitability. This is another legitimate threat that has caused an overhang on its shares.

Micron Revenue By Region

(Source: BQ's Industry Tracker)

Now, let’s refrain from agreeing or disagreeing with the above-mentioned risk factors, as several SA contributors have already made very interesting cases in their prior articles, but let’s just focus on market action in this one for now. We have known about softening spot prices and escalating trade-relating tensions for many months now; the chart attached above clearly highlights that spot prices have gradually trended downwards over the past several months and the decline wasn’t overnight.

But, the point is that Micron’s short interest hasn’t picked up in spite of a plethora of bearish reports that basically regurgitate the above-mentioned risk factors. This at least goes to suggest that market participants aren’t confident about how far Micron stock will go, or for how long will the downtrend continue. If there was any sense of surety amongst traders, speculators and investors regarding how far Micron’s shares would fall further, then market participants would have actively initiated short positions against the scrip. But we never saw this shorting activity, did we?

This leads me to believe that the above-listed risk factors are making retail investors anxious; weak hands have been offloading Micron stock and that sudden oversupply is causing its shares to plunge. I say this because institutional investors have been increasing their exposure to Micron of late, while its shares have trended downwards. These entities tend to have a longer-term view and it seems like they expect most of the noise surrounding Micron to subside going forward. Otherwise, it would make little sense why these entities would pile up on Micron stock if its fall from grace was so obvious.

(Source: Nasdaq)

Undervalued?

Besides that, short-side traders need a credible thesis and a justifiably decent downside potential for going against the masses and initiating a short position in any particular stock.

However, if we take a look at the chart attached below, it's evident that Micron's shares are currently trading at extremely low P/S multiples. Note that these are forward-looking multiples that are based on the Street's 1-year revenue forecasts for each of the mentioned companies, meaning this chart factors-in the impact of softening DRAM and NAND ASPs.

(Data from Ycharts, Compiled by Author)

Note that Micron has one of the lowest forward P/S multiples amongst the lot, arguably making it seem like an extremely undervalued stock. So it would make little sense to short the chipmaker at its current share price.

Takeaway

It’s clear that market participants aren’t actively shorting Micron. If there was seriously something wrong with Micron, or if its growth in the coming year was in jeopardy, then we would have seen a material uptick in its short interest. However, that clearly hasn’t yet.

On the other hand, institutional investors are piling up on the chipmaker’s shares. This dynamic suggests that big money isn’t betting on Micron’s shares to fall big time, but rather, it continues to be bullish on the name. So, I would recommend investors with a long-term view to remain patient, and consider accumulating Micron’s shares if they drop down further. Good luck!

Author's Note: I'll be writing another report on Micron over the next week. Make sure to click that "Follow" button at the top of this page to get a notification as soon as the report goes live. Thanks!

Disclosure: I/we 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.