Source: Yahoo Finance
The Semiconductor sector has been hit with lackluster performance as of late and many are calling for the end of the cyclical trade. The nature of this sector comes to an end when demand is met with over supply pressuring profit margins. In the past these cyclical trends were short lived compared to this current cycle. In this cycle the industry expects growth for several years driven by an upsurge in smart phones and a new demand in autonomous vehicles.
Micron to expand the Virginia chip plant
Micron’s (MU) recent announcement to spend $3 Billion by 2030, adding 1,100 jobs, foreshadows the demand expectation in the companies “long-lifecycle products.” These products primarily focused for the automotive and industrial industry speak of demand that will maintain a stable income stream for the company for a few years to come. The production is expected to increase supply by first half of 2020.
Applied Materials, Inc. (AMAT) and Lam Research (LRCX) both experienced pressure on stock price from weak forward guidance attributed to weaker than expected smart phone cycle. Lam Research did expect a trough quarter with business picking up into 2019.
Micron is a major customer of Applied Materials, and they have shifted to optimize their business in such a way to offset weakness experienced by others. They are selling a mix of higher priced products that are offsetting any pricing weakness seen by companies like Lam Research.
The cyclical party is not over yet. While everyone is so quick to call it the beginning of the end, I see more upside left. Apple’s super iPhone cycle never really took off with their iPhone X. They are expected to release 2 or 3 models to drive higher smart phone sales. Smart cars, and autonomous vehicles require a huge amount of semiconductor parts and that era is in its infancy.
Since Micron is still adding manufacturing capacity that will produce in 2020, they must expect healthy margins and demand for the next few quarters to continue. There will be a business update on September 6, 2018 by CFO Dave Zinsner. I expect that to give further upside to the share price. I am expecting a business update on the earnings for this quarter but not on future guidance.
The average price target by the best performing analysts on Micron provides the potential for a 60% upside. Majority of the analysts covering the stock maintain a strong buy rating.
Hedge fund activity shows a negative trend with an overall decrease of 7.7M shares over the last quarter. It is my opinion that this is more a sign of risk aversion and profit taking than an actual shift in outlook.
Source: Think or Swim
Micron stock has retraced to the Fibonacci 50% level. The blue channel is the expected upward path. It is my opinion that the update from the CFO in the coming days will have substantial impact on the stock direction. Expecting strong quarterly earnings and no mention of guidance may tilt the balance to favor higher stock in the near term. I am not expecting any parabolic moves higher but simply a steady move higher topping out near $67/share.
My long term view on Micron is that we see higher share price into 2019 and I will remain bullish until the first half of 2019. Short term threat remains more geopolitical and likely to subside in time.
Disclosure: I am/we are long MU.