Micron Technology, Inc. (NASDAQ:MU) shares popped higher on Wednesday, helped by a combination of broad market strength, resilience in the face of some negative analyst commentary on Tuesday, and the company’s appearance and presentation at the Credit Suisse 22nd Annual Technology, Media & Telecom Conference on Wednesday.
Remember, this stock will put out its earnings report in December (12/18), so investors are still trying to get some kind of hint about whether the company is set to “caution” or “warn”, or if it sees things tracking well. Considering the NAND supply issues, CPU shortage, and DRAM downturn, and perhaps more importantly, considering the relatively disappointing performance and guidance out of most chip stocks last month during the main Q3 earnings season reports, we would assume the MU tape was somewhat braced for near-term cautionary language from the company at the event on Wednesday.
Micron Technology, Inc. (NASDAQ:MU) is, as the reader is likely no doubt aware, probably the most important DRAM play. Dynamic random-access memory (DRAM) is a foundational semiconductor memory form that stores each bit of data in a separate tiny capacitor within an integrated circuit. This is a straight binary process.
The company also provides NAND products, which are electrically re-writeable, non-volatile semiconductor memory, and storage devices. Between the two (DRAM and NAND), the company is a central weather gauge for the memory cycles that underlie a lot of the technology sector business cycle.
As far as what we heard from management at the conference, the most serious concerns should be eased.
The company noted that revenues were tracking “towards low-end of guidance while EPS seen at higher-end of outlook”. We also would note that management stated it was “very pleased with progress on tariffs”.
The other noteworthy statement from the conference was the sense from the company that the NAND supply issue will improve by the second half of next year.
Weathering the Glut
For those who don’t understand this issue, it’s very much like a commodity producer dealing with an oversupply or glut of a commodity. There isn’t an OPEC of the chip space, so you can imagine how volatile oil prices might be if no one ever came out and cut production rates. That’s what you are dealing with in the memory chip space.
Each producer is caught in a game theory dilemma. If you own a NAND production facility, and you suspect that a glut is building, you can choose to cut down on your own production, but that simply means other producers will take market share from you, and the glut will build anyways.
It’s a phenomenon known as the “Tragedy of the Commons”. Each person acting completely rationally brings about a collective problem as an aggregate phenomenon.
For MU, this problem got traction in Q1 of this year, and it has matured ever since. It will simply have to work itself out. The central issue is about new smartphones and SSD memory in laptops.
The negative analyst note that we mentioned earlier was centered on a similar dynamic in the DRAM market, which is a consequence to a large extent of the CPU shortage from Intel. However, as we noted last week, there are several signals that suggest the shortage may be over by the end of Q1 2019.
According to UBS research, a substantial further degradation in both DRAM and NAND prices may be already priced into MU shares (which would have a book value of $31/share next quarter even if DRAM/NAND prices were to fall another 35% next year).
So, from that perspective, this is hardly an overpriced stock at current levels. And, assuming management knew what it was saying at the Credit Suisse conference, the only risk here (a serious negative surprise on Dec 18) may now be off the table, suggesting that we shouldn’t be surprised to see a consistent bid underpinning MU shares into the report.