Micron Stock Up 1.4x From March Low- Is The Rally Over?

Despite a 41% rise since its low in March, at the current price of $49 per share we believe Micron stock (NASDAQ:MU) has reached its near term potential. Micron’s stock has rallied from $34 to $49 off the recent bottom compared to the S&P which moved 36%. Further, Micron’s stock is also up 18% from levels seen in early 2018, a little over 2 years ago.

Micron stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, demand and revenues will likely be lower than last year.

Some of this rise of the last 2 years is justified by the roughly 15% growth seen in Micron’s revenues from 2017 to 2019, which translated into a 25% growth in Net Income (earnings margin nearly doubled in 2018, but was back in 2019 to about the same level as 2017). Micron saw a 50% growth in revenue and an 85% jump in net margins in 2018, due to higher selling prices for its latest memory chip technology. However, the semiconductor supply glut in 2019 led to a 25% drop in revenue, and sent earnings margins back to 2017 levels.

Its PE multiple has seen a slight decrease over this period, despite the supply glut clearing out, and memory demand expected to rise above 2019 levels. Further, we believe the stock is unlikely to see significant upside despite the recent rally, owing to the potential weakness from a recession driven by the Covid outbreak. Our interactive dashboard What Factors Drove 18.4% Change in Micron Technology Stock between 2017 and now? has the underlying numbers.

Micron’s PE multiple changed from 8.8x in 2017 to 2.6x in 2018, as earnings shot up but the future looked bleak with significantly lower demand leading to a supply glut. While the company’s PE is now roughly 8.6x, there is a downside when the current PE is compared to levels seen in the past years. PE of 6x at the start of 2016 and 2.6x as recent as late 2018.

So what’s the likely trigger and timing for this downside?

The global spread of Coronavirus has meant there is much lower demand for computing devices across all markets, which means lower memory device demand, and hence lower demand for Micron’s products. In addition, there have likely been supply disruptions in China and elsewhere from the global Coronavirus crisis. We believe Micron’s Q3 results at the end of June will confirm the hit to its revenue. It is also likely to accompany a lower Q4 as-well-as 2020 guidance.

If there isn’t clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/E decline from the current level of 9x to 6x (the 2016 level), which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $30.

For more insights into how Covid-19 could impact Micron’s semiconductor peer Texas Instruments, view our interactive dashboard Texas Instruments Downside: How Low Can Texas Instruments Stock Go?.

Our dashboard forecasting U.S. Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture.
The complete set of coronavirus impact and timing analyses is available here.

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