Time To Sell Micron Technology Stock?
Up more than 2x since March, we believe Micron Technology stock (NASDAQ: MU) could see significant downside. Micron Technology is a memory semiconductor company, manufacturing DRAM and NAND semiconductor raw materials, used by HDD and flash manufacturers. MU stock trades at $73 currently and is, in fact, up 36% so far this year. It traded at $60 in February 2020 – just before the outbreak of coronavirus – and is currently 20% above that level as well. Further, Micron’s recent full-year 2020 earnings saw revenue drop to $21.4 billion from $23.4 billion in 2019. A rise in COGS and operating expenses weighed heavily on the company’s profitability leading to a drop in EPS from $5.67 in FY 2019 to $2.42 in FY 2020. Further, with memory demand still far from pre-Covid levels, the recent work from home trend has seen a jump in cloud storage, making it the preferred storage platform as compared to physical storage. We believe this will hurt demand for the company’s products in the near to medium term, and the stock has the potential to drop around 20% to its pre-Covid levels. Our conclusion is based on our comparative analysis of MU stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.
2020 Coronavirus Crisis
Timeline of 2020 Crisis So Far:
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- Since 3/24/2020: S&P 500 recovers 66% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
In contrast, here is how MU stock and the broader market fared during the 2007-08 crisis.
Timeline of 2007-08 Crisis
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- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
MU and S&P 500 Performance Over 2007-08 Financial Crisis
We see MU stock declined from levels of around $11 in September 2007 (pre-crisis peak) to levels of around $3 in March 2009 (as the markets bottomed out), implying MU stock lost 71% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of just over $10 in early 2010, rising by 228% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.
MU Fundamentals Over Recent Years
MU revenues increased from $12.4 billion in 2016 to $21.4 billion in 2020 (MU’s fiscal year ends in August), primarily due to higher revenue from the DRAM memory segment. Along with higher revenue, earnings also increased from -$0.27 to $2.42 during this period.
Does MU Have Enough Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?
MU’s total debt decreased from $11.1 billion in 2017 to $6.6 billion in 2020, while its total cash increased from around $5.4 million to $8.1 billion over the same period. Further, the company generated over $8 billion cash from operations in fiscal 2020. Strong cash from operations provides the company a reasonable cushion to deal with the current crisis.
Phases of Covid-19 Crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment
With the recent surge in the number of new Covid-19 cases in the U.S., we see demand for memory products staying weak in the near term. Further, with work from home gradually becoming the norm, people could continue drifting toward cloud storage, further weighing down demand for physical storage. We believe that Micron stock has some potential downside in the near term, and even as the lockdowns are gradually lifted, a quick turnaround in physical memory demand does not seem very likely. This could see MU stock potentially drop 20% from its current level.
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