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Micron's Stock Declines May Be Far From Over Amid Falling Memory Prices

Oct. 04, 2021 10:40 AM ETMicron Technology, Inc. (MU)88 Comments

Summary

  • 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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Micron headquarters in Silicon Valley

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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

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This article was written by

Mott Capital Management profile picture
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Comments (88)

K
Have you been right on anything this year? Even the things you're bullish on are wrong. I can't get Seeking Alpha to stop placing your articles in my headlines even though I dont follow you. Any fix?
d
@Kamaal mute him?
C
In @robert Castellano I trust.
David Faltz profile picture
Micron is only up a mere 18% since you posted this article... You are the gift that keeps on giving.
d
@David Faltz The guy just keeps racking up an impressive list of spectacularly wrong predictions... at least with the stocks that I follow.
c
@David Faltz This guy messed up every growth tech stock. What a shame!
v
@David Faltz I wonder how he feels today.....
C
$70.62 on publication day 10/4/21. Looks like it may close >$76 today?

Good thing I regarded options activity and technical theories consisting of, "A break of technical support could send shares down to $58" with a grain-of-salt.
l
Nov 12 $77.30
Nov 11 $74.55 +/- $20 depending on 🔺️ triangle.
C
Just checking in as MU might close >$75 today.
J
Lots of macro issues here going on affecting Micron. As I mentioned earlier sold off MU however as it drops looking at new entry point.

Mott called triple top a while ago and he got beat up pretty badly.

More and more it is evident he was correct. Especialy with recent anaylst downdgrades.

Hard right now with all of inflation fears, (something I mentioned to an author months ago who told me I was crazy and there wouldn't be inflation).

Continue to look at highly devauled areas in tech, as well as trying to find good entry points into new healthacare and financial opportunites. Purchased LUKOY a while ago and was happy I did with the crazy energy issues we are seeing, Looks like Russia will be suppying Europe with oil and gas for a while.

Continue to review energy sector and will throughout winter to see where we stand in spring and how bad heating costs as well as gasoline is positioned.
d
@JayP-001 Everyone is looking at rising prices and is liberally throwing the word "inflation" around. Prices can go up because there is an oversupply of money or because there is an undersupply of goods. Unfortunately, we have both happening right now: Fed printing money and production/distribution chains being severely disrupted by economic shutdowns. It's really hard to separate the causes, but separating them is really important for devising the correct investment strategy in these crazy times.
J
@dima_b I am focused on dollar supply and how much printing has occured. 36% of dollars are from last year. Official inflation is at 6.2% and this is understated when you look under the hood.

Wether R or D we just passed another omnibus spending package that is touted as being at zero cost. I don't believe that based on history of Federal government. As long as we can print and tax there is never enought money or fiscal discipline to control wasteful spending.

Have been looking at the rate of QE for some time and not just in US. We also have Evergrande ready to hit world markets which is going to be interesting to see the fall out. Founder has pledged his assets but I think I read this is most indebted company in history.

Running a small business myself and having worked for Federal gov doing contract works IDIQ I have seen both sides.

While it is hard to seperate and know for sure I agree with you on we have both situations occuring. To much money printed and a lack of supply due to impact to supply chains and other issues. The container ships off coast is not an easy fix as it is more than just unloading it is trailers to cary them, independant truckers incentivized to wait around to pick them up. Access to the facilities via security and background checks etc. This is like a whiplash effect from shutdowns and it still isn't stabilized. We are seeing the resonations in the supply chain and it has not stabilized. Some of this is indemic to the supply chain itself as I mentioned not any driver can show up to a port and take a load., there is a validation process.

I would like to see us spend more fiscaly responsible and stop all of these ombibus bills and clean up the supply chain.
d
@JayP-001 I completely agree with everything you say, especially the part about being more financially responsible. Unfortunately, while the supply side issues may eventually resolve themselves, I don't hold any hope for curtailing government spendings. Several attempts over the last 15 years to do this had failed measurably and only resulted in more want for bigger, more powerful government. I'm not very optimistic about prices coming down either even if the costs jacked up by supply issues will subside. The only thing that will make businesses give back these windfall profits is fierce competition, but big government supporters/enablers in the general voting population have the upper hand at the moment and are hellbent on putting draconian reins on market forces. If these profits don't go back to consumers, perhaps they will be distributed back via dividends (unless extracted via higher taxes), so there might be some silver lining in this for us, investors.
m
Holding MU can be risky even when they are beating and raising guidance. The question to ask yourself is do you really want to hold on when they start underperforming the estimate in the midst of multiple downgrades. Have you not learned anything from repeated mistakes of the past?

Been happily out of the toxic stock since early 2020. And even more happily invested in NVDA and AMD. Would not consider getting back into MU until it falls into the 40s…
r
@magnum990 according to your prior posts you sold all your MU at $50 on July 28th '20 (closed at $50.09 that day). Since you sold, MU shares are currently 40% higher now, and at one point earlier this year were 100% higher. So, I am not sure how that makes you "happily out"...

Being in AMD and NVDA during the same period, you've crushed it, so probably not too worried about your missed gains (I am in both as well). However, if you were to deploy a bunch of cash right here - are you really telling me you'd put in AMD or NVDA over MU right now? I wouldn't.

You're correct that holding MU can be risky, but that depends on the time period you're looking at (e.g. over the past 10 years it's proven to be a solid investment at up 10x, 5 years up 6x).

You speak like it's a certainty that MU will head down to Book Value (around $40), which is possible, but I wouldn't count on it.

"in the midst of multiple downgrades. Have you not learned anything from repeated mistakes of the past?"

> Perhaps it is you who hasn't learned from a mistake of the past. Sell on the multiple upgrades, Buy on multiple downgrades.
m
@roosterBDA

The stock was near 50 in Nov 2017, and it was still in the mid 50s two and a half years later while the market was making new pre- Covid highs. That's the kind of shit I don't want to deal with - depending on what exact date you bought the stock you could be holding for 4 years with cumulative returns of only ~30% (50 -> 66). And let me tell you something - if the stock were to revisit 50 in the next few months, nobody would be surprised at all - Not one single person would have the slightest look of puzzlement on their face... You could be looking at a 4 year investment with a ZERO total return.
d
@magnum990 There is a persuasive argument that the nature of the industry and the company has changed drastically since 2017, and the bull case is built on that narrative. So in that context, the argument of "look at the past performance" is not convincing and is rather moot. So if you disagree with the position that the conditions have changed, I would love to hear specific counterarguments.
J
Sold off my shares after an earlier article. Hats off to author on good call. Will have to wait and see a little bit as this is still a good long term stock and if it falls much further may be worth a re-entry.

Macro picture is so messy right now hard to get good sense of what will happen.
S_Archer profile picture
FYI: we are now at my published price target based on P/B. I didn't think we would get here this way.
PBRM1 profile picture
Turns out Mott is the smartest guy in the room. Wish I would have listened to you at $77 a share, would have saved myself 15k. My hats off.
C
@Seeking Mammon
Any new thoughts 5 weeks later.
M
In all fairness to the author he was spot on in his MU piece. I think he has a far better knack for digging into individual names versus his broader market calls.
Mott Capital Management profile picture
@Moomoo22u2 my broader market calls are all falling into line. I have a knack for being very early
d
In all fairness to a broken clock...
Mott Capital Management profile picture
@dima_b except for eveything I have laid out from yields to the dollar, slowing growth, to falling eps est, to the vix, etc. has been spot on...
w
I believe that you can not make money by trading stock.
E
All we hear about is low inventories and high prices...
@Blunder Boy

That's what everyone already knows and what the markets have priced in. Now, something else is being priced in.

Micron is headed lower, probably for USD 60.
S_Archer profile picture
@Blunder Boy Micron already stated that their customers have too much inventory and are reducing it. Micron will add to its inventory ... so they will keep manufacturing but not sell as much. Hence the Micron forecast.

Second, at the end of this, There will not be a shortage since Micron is building inventory. Therefore one would expect prices to drop. Which they did.

That is how the cycle works.

When customers start to increase purchases, and micron depletes inventory, that will lead to higher prices. Maybe toward end of 2022.

Just a guess
E
I suppose we may see!
Robert Falcone profile picture
My understanding of the current climate is that revenues have been delayed and not deleted. I'm mostly buying companies that have somewhat unaffected margins as a result of this not so transitory inflation.
s
Reading the requirements for Windows 11 and that 50% of the PCs in the world can't support it whatever pain there may be, down the road (and it may be a long road as Windows 10 is supported till 2025) there will be a huge upsurge in anything and everything computer.
As to the pundits who seem to prognosticate after the fact (MU will go to $140 as it hits $95 and MU will go to $95 as it drops to $70) I'm glad I'm not paying their salary. They seem to have this unique ability to be late to the party with a lot of their predictions.
S_Archer profile picture
@steve1189 The pundits make price forecast based on the last month of stock price. Its really embarassing for them (I work for one of the analysts... I tell them this all the time) In a cyclical market, they are always wrong.

they increase target after price goes up. Lower it after it goes down.
S
I'll add a Bearish comment to a Bearish article. Long MU, but misery deserves company.

I pointed out in other comments that my biggest concern from the recent earnings is the estimated CapEx of $11 billion to $12 billion. "The year-on-year increase in CapEx is driven by our continued 176-layer NAND transition pilot line enablement for next-generation NAND and DRAM and continued infrastructure and prepayments to support the introduction of EUV." - Sanjay

Zisner added: "We feel CapEx equipment in DRAM will be down year-over-year." However, "NAND will actually step up pretty meaningfully in fiscal '22 versus '21, if you remember, we took CapEx, way down in fiscal '20, boost it up a little bit in 21. Now we're up to kind of a full investment level in '22 to support 176-layer."

So they are spending big on NAND (the actual commodity) how nice (sarcasm intended). Here is the CAPEX spend from prior years - please notice the extreme jump:

2016: $5.4 billion
2017: $5.13 billion
2018: $8.2 billion
2019: $9.11 billion
2020: $7.95 billion
2021: $9.72
2022: $11-12 billion (estimated)

Keep in mind this $11-$12 billion is not to increase overall market share/supply. This is literally just to "keep up with the Jones'."

The practical implication of this is that 2022 cannot possibly replicate 2018 in terms of profitability or cash flow and I'm really trying to wrap my head around the silver lining here for 2022.

What are the overall numbers going to look like with possibly $12 billion in capex spend alone? Let's say you have $32 billion in revenue (more than 2018 which was $30 billion) and average gross profit margins of 55% (generous) that gives you ~$17.6 billion. Then you subtract $12 billion for CapEx and you only have $5.6 billion for everything else. Operating expenses will be at least $4 billion.

So I guess what I am trying to say is that we could easily see "record" revenues in 2022 but with that $12 billion CapEx it could be a mediocre year overall.
R
@Scott the Robot great summary statement Robot. I agree. Everyone is talking about a memory bull market, but I just don't see it. I see capex eating the cash flow, and the macro environment (running out of stimulus, supply chain, raw material shortages, oil/natural gas, partisan gridlock) throwing a wet towel over 2022. FWIW, I'm expecting Black Friday/Cyber Monday to be a bust this year, my tech exposure is minimal, I'm positioned in energy
PBRM1 profile picture
@RedFiero I sold my 3000 share position today. I can't help but feel duped by the MU apologists on his site who've come out in droves after each earnings report. I think this is a good company but it is a highly manipulated stock. Plus the economic policy being pushed at the national level is completely insane. Couple that with geopolitical uncertainty, ie China invading Taiwan, the storm clouds are gathering. As Jesus said:
Now learn a parable of the fig tree; When his branch is yet tender, and putteth forth leaves, ye know that summer is nigh: So likewise ye, when ye shall see all these things, know that it is near, even at the doors.
God bless folks.
S
@Seeking Mammon Speaking of "duped" the share count went up this year from 1.110 billion (September 2020) to 1.120 billion (September 2021) (or an increase of 10 million shares).

Yet Micron says in its earnings report: "Micron repurchased approximately 13.9 million shares of its common stock for $1.05 billion during the fourth quarter of 2021 and 15.6 million shares of its common stock for $1.20 billion during the full year of 2021."

There was $395 million in "stock based compensation" in 2021. Now we are entering into a heavy CapEx period where free cash flow may not be as high so who knows if the share count will go down next quarter, but I will be keeping a close eye on this. I held my shares in 2018 at least in part due to the "buy back" since I truly believe if executed properly it will return significant shareholder value. However, if it is just used to enrich management/employees, that's not a very nice thing.
S
This guy...

I would much rather have an article providing more detail about the Digitimes report, which I cannot see because it is behind a paywall. That article does have material information (unlike this article).

I'll say it once, and I'll say it a hundred times. I don't care if people are buying or selling options predicting Micron's share price will go up or down. It is what people do. People bet on the share price going up, and people bet on the share price going down.
A
@Scott the Robot I agree completely. Who gives a flying *bleep* about what other people think or imply. I care about facts so I can draw my own conclusions.

Just give me an analysis of the industry or of the company financials or whatever, but this is completely useless noise.
bubbleking profile picture
Imagine an index that uses the share price of the company as a component tracking closely with the share price of the company.
FabulousBoringRoy profile picture
If Micron drops to 58 I'm going to cash out refinance my house and load up because that would be a ridiculous price for a company that will probably have $10 to $11 EPS in fiscal 2022.
christophe profile picture
Thanks all for the quality comments here.

@FabulousBoringRoy in 2018 MU had $11.95 EPS. It put in a ATH in May 2018 at $62.62. If you had "refinanced the house" in 2018, to load up on MU, you would have had years in the red. It had a low of $29 12/2018 (PE in the 3s). The following year EPS was $6.35.

MU was/is a cyclical stock which requires careful consideration before loading up. We still have not beat the 2000 ATH of $98 and it took years to beat the 2018 high.

MU seems attractive in relation to recent price action (down 28% from recent ATH). However, we are at the obvious key support level of ~$69. If it does not hold, we have a "big gap" down to the low $60s (maybe with possible light support ~$65 in between). The recent intra-day low set on 8/23 is $68.90. That is the level MU needs to hold to pass this storm.

If today, you are that bullish MU at $58 you could sell DEC $60 Puts and collect $1.10 per share. If MU stays above $60 you keep the premium, if it goes below you will be assigned with a cost basis of $58.90.

I also like MU. But I will wait a bit to see the behavior at this key level $69 before investing.

Peace!
PS Just noticed the recent high was 96.96 and the 2018 high was 62.62 what's up with that? :-)
FabulousBoringRoy profile picture
@christophe Thank you for the comments. I have indeed been selling puts at $65 strike and $60 strike spread through November, December, and January. If the stock dropped to $58 I would be assigned all those shares, and then I would buy more on top of that. The company is further along from 2018 (1-alpha, 176 layer, GDDR6X, converts 100% gone, cash pile bigger), the macro trends are further along than 2018 (AI, EVs and autonomous driving, 5G, work/learn from home, etc.) and 2023 looks better than 2019. The only way that Micron can fail longer term is if TSMC, Intel, GlobalFoundries, Samsung, ASML, AMD, Nvidia etc. are all horribly incorrect and the hundreds of billions of dollars in logic fabrication expansion is all for nothing and logic chip demand doesn't grow. If that happens the entire economy is screwed and I'll just go live in a van with a dog.
B
@christophe "The recent intra-day low set on 8/23 is $68.90. That is the level MU needs to hold to pass this storm.

That reminds me of the time back on 1/20/2016, when the intra-day low bottomed at $9.31 -- a multi-year low. It was not until 13 May that the closing low of $9.56 was established – a closing low that has held ever since that infamous day in May.

Needless to say, the bears were in full control on Seeking Alpha; I’m not sure if Mott Capital was cheering them on during those turbulent days – when it was raining gold for the true Micron believers!
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