- An article in DigiTimes notes that memory chip prices are coming under pressure.
- It appears that this is bringing back the put buyers that have circled this in the past.
- A break of technical support could send shares down to $58.
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This article first appeared for members of Reading The Markets, an SA Marketplace service, on October 1. The article has been updated as of October 4.
Micron (NASDAQ:MU) reported better than expected fourth-quarter results but gave weaker than expected first-quarter guidance. The company guided fiscal first-quarter results in a range of $2.00 to $2.20 per share, and revenue to $7.4 to 7.8 billion, with gross margins at 46 to 48%.
The guidance was well below expectations; analysts had forecasted revenue at nearly $8.6 billion for the first quarter and earnings of $2.58 per share before the company reported results. Analysts had been looking for gross margins of 48.5%. Based on current guidance, the company is looking for flat margins, assuming the mid-point of the range.
However, analysts may need to revisit their expectations with price targets that seem way too high. Additionally, it seems plausible that the stock's decline isn't finished as memory chip prices come under pressure.
Lower Memory Prices
An article published on DigiTimes indicated memory chip vendors are now under pressure to offload inventories. The article notes Samsung (OTCPK:SSNLF), Micron, and Western Digital (WDC) are looking for support and urging companies to take delivery of more chips. The report notes that this could be a sign that a buyers' market is coming. Based on the article, it sounds as if prices for memory chips are heading lower.
The article notes there has been a slowdown in orders placed and that DRAM contract prices are poised to see a larger-than-expected drop in the fourth quarter. It would follow a 20% drop in the third quarter.
A separate article on DigiTimes notes PC DRAM contracts are expected to drop 10% in the fourth quarter, and prices for NAND chips will drop slightly. The report notes that there may be further drops in the first quarter.
This negative outlook is reflected in the DRAMeXchange DXI Index, which peaked in July and has been heading lower and showing signs of significant weakness. Micron's stock price appears to track that index closely.
From viewing the chart more closely, it seems that there has been a recent downtick in the DXI index, which appears to correspond to the price of Micron's stock.
Put Buyers Return
The negative news is bringing the puts buyers back to Micron. The open interest on October 1 for the December 17, $75 puts rose by more than 6,000 contracts. Additionally, the contracts for the December 17, $75 calls rose by around 6,000 contracts. The data shows it as a spread transaction with the puts bought for $6.34 per contract and the calls trading for $2.79 per contract. The trader paid a net $3.55 to create the bearish trade. It is a bet that the stock will be trading lower than $71.45 by the middle of December.
Bearish Patterns for Micron Stock
The technical chart for Micron remains very bearish, with a vast descending triangle that started back in April. The stock has found support around the $70 level since the mid-summer. However, a descending triangle pattern is exceptionally bearish and suggests that the stock will fall. Once support is broken at $69.75, the stock could drop to roughly $58, filling a technical gap from November of 2020.
The RSI is trending lower and has yet to hit oversold levels at 30. Additionally, the MACD indicator has also been trending down as well. Both suggest that momentum in the stock is very harmful and that lower prices are likely to follow.
Sell-side Off Base
The sell-side looks way off base on this currently, with an average price target that is still way too high at $104, which is down from $114.55 before the company reported results. The difference between the stock prices and analysts' price targets is at its widest point since 2016. It will be hard for sell-side analysts to maintain these price targets for much longer if the stock does not recover, especially if memory chip prices are coming under pressure. If price targets begin to get cut, it will create an additional layer of selling pressure.
At the moment, it seems hard to imagine this stock rebounding in the face of falling memory chip prices. It seems reasonable to think that Micron's gross margins may have already peaked for this cycle, and how far those memory prices fall will determine how far margins will need to be lowered and the stock price with it.
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