As Trade Tensions Ebb and Chip Prices Recover MU Stock Is a Buy

Double catalysts will propel MU stock

Investors in Micron (NASDAQ:MU) have had several nerve-wracking years. MU stock was on fire in mid-2018. After topping $61 in July of that year, it was at highs not seen in nearly two decades.

https://investorplace.com/wp-content/uploads/2019/10/mu1600d-300x169.jpg
Source: Casimiro PT / Shutterstock.com

Then two things happened. First, the prices of DRAM and NAND flash memory (two of Micron’s primary products) began to drop off a cliff. Then the U.S. entered into a trade war with China — Micron’s largest market. The results of that one-two punch were predictable.

However, MU stock has been in recovery mode since dropping to the $30 level to end 2018. It closed at $56.47 on Tuesday, another 1.91% gain. Why the sustained recovery? Can it last? And with Micron trading near those 2018 highs, is there still room for growth?

DRAM and NAND Prices on the Rise

Micron is an American semiconductor company and two of its biggest revenue generators are DRAM and NAND Flash memory. These chips are used as memory and storage in a wide range of products, including computers, SSDs, tablets, smartphones and camera memory cards.

Historically, the price of DRAM and NAND flash have been cyclical. Demand rises and falls along with sales cycles in the end products. As demand falls, there is a glut of chips and prices fall — sometimes dramatically. This is inevitably followed by a period of high demand and shortages as chip makers scramble to keep up, along with rising prices.

A handful of manufacturers dominate the market — including Intel (NASDAQ:INTC) on the NAND side of things. Micron’s annual DRAM revenue dropped from $21.23 billion in 2018 to $15.25 billion in 2019. NAND flash revenue dropped from $8.4 billion to $6.95 billion in the same timeframe. That bottoming out of the DRAM and NAND flash market resulted in Micron’s annual revenue dropping from $30.39 billion in 2018, to $23.41 billion in 2019. 

DRAM prices are now on the rise, and there are predictions that the price of NAND flash memory could increase by 40% in 2020. That is nothing but good news for Micron’s revenue and MU stock.

The Easing Trade War

In addition to falling prices on two crucial products, Micron faced the fallout of an escalating trade war between the U.S. and China. American tariffs against $34 billion in Chinese goods were imposed in July 2018, kicking off the trade war. Not coincidentally, Micron stock began a steep dive at that point. Not only was the company facing slumping prices, but the Chinese market accounted for over 57% of Micron’s sales. As the situation between the U.S. and China escalated, the risk to Micron rose.

However, the U.S. and China kicked off 2020 with the signing of a “phase one” trade deal. Both sides seem eager to cool the trade war, and that takes considerable pressure off Micron.

Bottom Line on Micron Stock

At this point, Micron couldn’t be in a much better position. The trade war between China and the U.S. — its two biggest markets — is cooling. The cyclical dip in demand and price for the two products that make up the vast majority of its revenue is over. Demand and prices are both set to rebound in 2020.

InvestorPlace contributor Luke Longo notes that the cycles in DRAM and NAND flash memory typically last for several years at a time. Therefore, “Micron is positioned to remain in growth mode well into 2021 and 2022.CNN Business investment analysts are virtually all bullish on MU stock as well, with 24 of the 29 polled having a “buy” rating on Micron and a median 12-month price target of $65. That’s well above the stock’s 2018 highs, turning the recovery into growth with a 15% upside.

Short of something unforeseeable happening, Micron is well-positioned to hit price levels it hasn’t touched since 2000.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.