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Shares of Micron Technologies (MU) have been gaining momentum for some time, with some analysts arguing that chip demand is expected to increase in the near term. The recent evolution of trade has also sparked the optimism of semiconductor companies, which are very sensitive to trade tensions. The Micron stock is up 2.88% at 11:01 am today. The stock also reached its highest level in 52 weeks of $ 50.00. Yesterday, Micron closed slightly up 0.53% to $ 49.39.
The Micron stock has generated stellar returns since the beginning of the year. The stock has risen 55.7% since the beginning of the year and has also mostly outperformed most of its peers and the broader market. Intel's NVIDIA (NVDA), Intel (INTC) and Qualcomm (QCOM) companies returned 37.5%, 12.6% and 41.2% respectively this year. The VanEck Vectors Semiconductor (SMH) ETF has increased 37.8% since September 10th.
So, should you buy Micron stock now? Let's try to understand the market trend, the determining factors of the title and the other parameters that affect it.
DRAM and NAND memory chips
Micron is a leader in the DRAM (Dynamic Random Access Memory) and NAND (AND Negative) memory chips market. While DRAM chips are found in desktops and servers, NAND chips are used in mobile phones and solid-state hard drives. DRAMs account for approximately 70% of Micron's revenues.
However, since last year, Micron suffers from a slowdown in the demand for memory chips at different levels. Declining demand from smartphone manufacturers (especially Apple), as well as the server market, has severely affected Micron. The crypto bubble burst and Intel's CPU shortage problems have also piled up its stock. In the face of declining demand and excess inventories, Micron and other chip manufacturers have also stopped production. A drop in demand has therefore led to a drop in memory prices, reducing Micron's profits.
Impact of the trade war on the Micron stock
Huawei's trade ban has also added excess inventory and hindered the demand-supply price-balancing process. Huawei is a key customer for chip manufacturers. In 2018, Qualcomm, Micron and Intel generated about $ 11 billion in sales by selling components to Huawei alone, according to Reuters. Huawei also added nearly 13 percent of Micron's revenue in the first half of fiscal year 2019. According to DRAMeXchange, Huawei's accelerated trade ban could further erode prices for DRAMs.
However, hope for a trade deal in October gives hope that President Donald Trump will lift the ban on US companies selling to Huawei. A trade truce is essential because China is the biggest market for chip makers. On Wednesday, the Chinese Ministry of Finance also announced that it would exempt 16 types of US products from additional tariffs. The news has boosted investor optimism. US futures also advanced.
Analysts expect a rebound in memory
According to some analysts, the demand for memory chips should improve next year. In July, Deutsche Bank maintained its positive position on Micron and said it expects the stock to experience a "recovery" in the near term. Deutsche Bank analyst Sidney Ho also raised Micron's target price to USD 55 and reiterated its buy rating. "The risks of a new revision of the negative estimate seem less likely," he said, adding that the stock should now recover from its current level.
Mark Delaney, an analyst at Goldman Sachs, also expects an improvement in the supply and demand of short-term memory chips. Yesterday, a KeyBanc analyst also bet on the title because of a recovery in demand for memory chips until 2020. Weston Twigg, KeyBanc analyst, also raised the target price of Micron $ 45 at $ 58, while maintaining an "overweight" rating.
Micron's outlook is positive
Micron also sees a recent increase in the price of its chips. During the third quarter of fiscal 2019, the selling price of its chips has improved slightly, benefiting from improved inventory. Although DRAM and NAND sales prices fell by 20% and 15% respectively during the quarter, the declines were lower than those of the second quarter, which were 22% and 25%, respectively.
Given the positive trend, Micron expects the DRAM market to return to marginal growth in the second half of this year. It also anticipates a stabilization of the NAND market during the second half of 2019. Twigg also plans to reduce NAND and DRAM stocks in the second half of the year.
Stock valuation of Micron
Micron's shares are currently trading at a PE ratio of 5.8x. In comparison, the Intel, NVIDIA and AMD counterparts trade at PE ratios of 12.1x, 47.9x and 160.70x, respectively. Although Micron looks attractive at the moment, its EPS growth rate is expected to fall by 47.9% and 58.2%, respectively, in fiscal 2019 and 2020. However, we expect accelerated growth after 2020 due to the improved price of memory chips.
Analysts' recommendations for the Micron stock
Analysts have mostly "buy" ratings on the Micron stock. Among the 34 analysts, 62% give it a "purchase" rating, 29% a reserve, and only 9% a "sale". At present, the target price for analysts for Micron is $ 49.36. On September 10, the stock traded at a premium rate of 0.06% above the analysts' 12-month target price.
Micron Technical Levels
Micron's 14-day RSI (Relative Strength Index) score is 68.09, which indicates investors are buying stocks. An RSI level above 70 indicates that a stock is in "overbought" territory.
On September 10, Micron shares closed close to $ 49.69, their upper bound of the Bollinger Band, suggesting that it was overbought.
The technical indicators show that Micron's stock is already overbought. However, we think the stock has additional upside potential. Expectations of a reversal of demand for memory chips and hopes for trade agreements should favor Micron's actions in the near term.
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