Micron's Stock Is On The Cusp Of A Breakout

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About: Micron Technology Inc. (MU)
by: Mott Capital Management
Summary

Micron's stock is nearing a technical breakout which may send it back to $42.

Management provided positive commentary at the JPMorgan Tech Conference on Jan. 8.

Views on the stock may have become too bearish.

Micron's (MU) stock has been on the rise, and the good news is that there may be more gains to come. The company noted on Jan. 8 at the JPMorgan Tech and Auto Forum Conference it sees a better second half of 2019.

The company also was very positive on the medium and longer term and notes it expects to see a significant increase in DRAM and NAND usage in automotive, industrial, cloud, and artificial intelligence. Micron also expects to benefit from increased usage driven from technological advances that will result from the roll-out of the fifth generation of wireless technology - 5G.

Technical Breakout

The outlook for the stock has dimmed in recent months on concerns over DRAM and NAND pricing. As we noted in our last article, the stock was nearing a bottom after the company provided weak guidance on its fiscal first quarter results.

Micron Chart

(Tradingview)

The previous article noted the stock would likely fall to around $29 and that price could serve as a bottom. To this point, that has been the case, and now the stock is on the verge of breaking out should the price rise above $36.40. If that happens, the shares may move higher back into a range between $40 and $42, an increase of 13% to 16% from its current price of around $35.60.

Additionally, the relative strength index is now beginning to turn higher. That would suggest bullish momentum is now starting to move back into the shares.

Volatility Lies Ahead

The long-straddle option strategy suggests the stock may rise or fall by as much as 21% by expiration on April 18 from the $35 strike price. That places Micron in a trading range between $27.60 and $42.20. The puts heavily outweigh the calls at that strike price, with 16,000 open puts to just 3,800 open calls. But if there's one piece of good news it's that the number of open calls has been steadily rising while the number of puts has stopped growing and is now slowly falling. It may suggest that traders may be slowly changing their views on the future of the stock to a bullish one from a bearish viewpoint.

micron options

(Trade Alert)

Too Bearish

The market may have gotten too bearish on Micron in the meantime, as consensus earnings estimates have been slashed dramatically, falling by 28% or more over the next three years from their highs. Analysts not only see no earnings growth over the next two years but are forecasting earnings to contract.

Chart

MU EPS Estimates for Next Fiscal Year data by YCharts

Revenue estimates also have fallen 16% or more from their highs.

Chart

MU Revenue Estimates for Current Fiscal Year data by YCharts

But perhaps there's a sign that analysts view may be changing. Bernstein upgraded Micron stock to Outperform from Market Perform following the JPMorgan technology conference on Jan. 8. The upgrade for the stock comes despite the analysts cutting its price target on the stock to $52 from $60. The analysts noted an earlier recovery in DRAM prices.

Risk

There's significant risk for this stock as noted by the volatility the options market is pricing in. That's because the outlook for the stock is uncertain. Although a recovery in chip demand may be on the way, it may take longer than the company's current projections. Additionally, the stock has been a gross margin story in the past and should gross margins not improve, additional revenue from the stronger demand may not reach the company's bottom line and earnings. Thus the stock will not see a benefit.

Views Shift

The momentum in Micron's stock continues to shift from bearish to bullish, and as long as the outlook for the company improves, the stock is likely to rise. But that also means that the company will need to deliver results because hopes and momentum can only take stocks so far.

Disclaimer: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.

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.