Micron Presents Opportunity Driver By Artificial Intelligence But Be Careful

Driven by artificial intelligence, Micron Technology Inc MU presents an opportunity for investors, but be careful. Micron is one of the three largest manufacturers of semiconductor memory in the world. To gain an edge, investors should do a 360 degree analysis that synergistically combines fundamental analysis, technical analysis, macro analysis, and quantitative analysis.

The Chart

Please click here for an annotated chart of MU stock.

• The chart shows a gap up after earnings release last quarter.  Bulls are expecting a similar gap up this time. However, prudent investors know that earnings is a risk event and the results can go either way. Consider starting with Arora Second Law of Investing and Trading, which states, “Nobody knows with certainty what is going to happen in the markets.” Consider following with Arora’s Third Law, which states, “Making investing and trading decisions based on probabilities is the only realistic and profitable approach.”
• The chart shows that in June, MU stock accelerated away from the trendline.
• The chart shows last week MU stock traced a bearish engulfing candle.  This is a negative pattern.

High Bandwidth Memory

High bandwidth memory is a new product. High bandwidth memory is needed for NVIDIA Corp’s NVDA platform to work properly. Hyperscalers, such as Microsoft Corp MSFT, Alphabet Inc Class C GOOG, Alphabet Inc Class A GOOGL, Amazon.com Inc AMZN, and Meta Platforms Inc META, are buying all the high bandwidth memory that is being produced. Other buyers include Oracle Corp ORCL and Tesla Inc (NASDAQ: TSLA).

Micron is sold out of high bandwidth memory for the rest of the year.

The Arora Report estimates high bandwidth memory will provide about $700M in revenue in 2024 for Micron. The Arora Report projects explosive growth with high bandwidth memory revenue for Micron reaching $3B next year.

AI PC

A typical AI PC will have about 15% more legacy D-RAM memory. This is good for Micron.

Solid State Disks

Demand for solid state disks is increasing. Solid state disks use NAND memory. Micron is a big producer of NAND memory.

Commodity Business

Investors need to remember that in the long run, memory is a commodity business. Like any other commodity, memory goes through boom and bust cycles. Right now, memory is going through a boom cycle, but prudent investors also need to know when to get off the train before the bust cycle. 

Pricing

For a commodity business, pricing is extremely important. Right now, pricing for high bandwidth memory is exceptionally high due to very high demand. Pricing for traditional D-RAM is rising due to the focus on high bandwidth memory. NAND pricing is also rising.

These price increases are good for Micron in the short term.

Earnings

Here are the key points about earnings.

• Consensus earnings estimates for Micron are $0.48 and $6.6B for revenue.
• Whisper numbers have been creeping up and are now at $0.55 in earnings and $7B in revenue.
• Stocks move based on the difference between the reported numbers and whisper numbers. Whisper numbers are the numbers analysts privately share with their best clients and are often different from the numbers the same analysts publish for the public.
•  Historically, Micron’s CEO tends to be very bullish.

Valuation

Right now, MU trades at a trailing PE of about 10. In comparison, NVDA trades at a trailing PE of 74. Those who are not steeped in the intricacies of the stock market are comparing the PE of MU to the PE of NVDA. Finding MU to be cheap relative to NVDA, less informed investors are rushing head long to buy MU.

It is important to understand that MU is a commodity stock and thus always garners a lower PE.

In The Arora Report analysis, at its peak, Micron has a capacity to earn as much as $20 per share. Therein lies the opportunity, as long as investors remember that the peak will likely be followed by a bust.

Competitors

The two main competitors of Micron are two Korean companies — Samsung Electronics Co Ltd (OTC: SSNLF) and SK Hynix. Both of these companies are rapidly increasing capacity for high bandwidth memory.

For the long term, the question is if these Korean companies will continue to increase capacity or if they will show restraint. If they show restraint, memory pricing will hold up. On the other hand, if they continue increasing capacity, when the cycle turns, the supply will become greater than the demand, leading to a plunge in pricing.

Probabilities

Here are the probabilities of the move in MU stock after earnings:

• 55% probability of a strong move up
• 30% probability of a strong move down
• 15% probability of staying range bound

Zones

Prudent investors use buy zones, target zones, and disciplined quantities relative to the full core position size to maximize risk adjusted returns. 

Trade Around Position

A trade around position is a billionaire and hedge fund technique that can dramatically increase your profits and lower your risks. As a full disclosure, The Arora Report issued a signal on a trade around position.

What To Do Now

Those in MU stock may consider continuing to hold.  Those not in the stock who are aggressive may consider focusing on a trade around position. Those who are not in the stock who are not aggressive may consider waiting for a dip in the buy zone.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.