Micron's Stock May Soar On Optimistic Outlook

Summary

• Micron has received some positive analysts' commentary in recent days.
• Traders appear to be growing more optimistic on the stock price.
• The technical trends are suggesting a break-out is near.
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Since December 9, Micron's (NASDAQ:MU) stock has jumped by over 19%, and now it may be getting ready to rise by as much as another 13% by the middle of April. The optimism in Micron follows some bullish betting recently seen in Western Digital (WDC), which was previously noted. The trend in optimism could suggest that the investors are growing more positive on the group, and that alone could help to carry Micron higher.

To add to the recent optimism, Cowen came out and upgraded Micron on January 7 to an Outperform from Market Perform with a price target of $70 from $50. The analyst raised his outlook as the outlook for the DRAM market may improve faster than expected. Also, on January 7, Bernstein noted an attractive risk/reward for memory stocks due to supply cuts and a rebound in demand.

Betting The Shares Rise

The optimistic outlook is resulting in traders buying call options, betting the stock will rise. Recently, the Micron April 17, $60 calls saw their open interest levels rise by around 17,000 contracts. The contracts saw their most significant jump in trading on January 2, and data from Trade Alert shows about 15,500 call contracts were bought on that day, for roughly $2.65 per contract. It means that the stock would need to rise to around $62.65 by the expiration date for the trader to break-even. That is an increase of 13.2% from the current stock price of $55.34 on January 7.

Additionally, the March 20 $60 calls also saw a jump of around 11,000 contracts on the same day. The calls also traded on the ASK and were bought about $1.95. In this case, the stock would need to rise to around $61.95 for the trader to break-even.

Technical Trends Improve

The stock has been caught in a trading range between $53 and $55.60 since the middle of December following the company's quarterly results. If it rises above $55.65, then it is likely to advance to the next level of resistance at $58.65.

Risks

However, should the stock fail to rise above resistance, it is likely to move lower back to support at $53. It could even fall towards support at $51.40. Additionally, even with trends in DRAM improving, it isn't clear how much of an improvement lies ahead. Analysts' estimates for fiscal 2020 show earnings falling by 65.6% to $2.19 per share, and those estimates have fallen by around 8% over the past 30 days. Meanwhile, revenue is forecast to fall by almost 13% in 2020, and have dropped by nearly 2.5% over the past 30 days. If the trends in pricing are improving, they are certainly not reflected in analysts' estimates for the year.

Data by YCharts

Regardless of the DRAM market, Micron is a stock that trades off of pure momentum for some time and can separate from the underlying fundamentals. It means that for now, the hope of an improving DRAM market may be enough to push momentum and the stock higher.

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.