Micron Technology’s (NASDAQ:MU) stock is a bellwether semiconductor stock. Even with a significant breakout after upbeat earnings, the stock has been consistently trading below the street’s price targets (Figure 1). At this stagnant level, even the most rabid MU critic should acknowledge the potential upside and downside if certain situations arise. To this end, I devised a process to explain how Micron’s stock has actually moved over the last five years. I then used this process to predict MU’s price moves in the short term.
DRAM and NAND Prices
It is widely agreed that the single most important fundamental factor to Micron’s stock is the memory chip DRAM and NAND prices (Figure 1). For 3Q18, DRAMeXchange forecasts that the total smartphone production volume will increase by 5-10%. And, the overall trend of contract prices in 3Q18 will not deviate noticeably from that in 2Q18. Prices of discrete products are expected to be stable or go up a bit in 3Q18, while prices of eMCP products are expected to either stay constant or go down slightly. It has been argued that Micron’s stock price slump is due to NAND pricing coming down. There is an immediate concern for Micron’s profitability as Micron scales up from 64 to 96 layers and sheds the remnants of their 2D portfolio.
Revenue vs. Earnings Surprises
There has been an extensive debate whether MU’s shareholders have paid more attention to revenue or earnings. Since Micron has become a memory chip “commodity” stock, it is the (industry) revenue growth which determines commodity stock price moves. On this front, Micron has beat 5 of its last 8 quarters’ revenue estimates. More importantly, MU’s prices tend to move up 0.80% for every 1% revenue surprise. On the other hand, MU has a conflicting record of missing the GAAP EPS 6 of last 8 quarters while beating adjusted EPS 8 of the last 8 quarters. As a result, for every 1% earnings beat, MU stock prices went up by 0.08%. For all practical purposes, the evidence suggests that shareholders pay more attention to revenue growth than earnings growth (Table 1 below).
Micron’s stock has been long known to be affected by institutions’ analyst recommendations. In a previous post, MU’s short volume increased sharply surrounding institutions’ upgrade and downgrade announcements, and MU’s stock prices dropped 16% in response to downgrades and jumped 10% in response to upgrades. More importantly, short volume increased prior to both upgrade and downgrade announcements.
Regardless of the intent of short sellers, MU routinely has one of the highest levels of short interest outstanding. The stock has been invariably negatively affected by the short sale activities (Figure 4). However, for any heavily shorted stocks, it is reasonable to expect that near-term stock price reversals may be in sight. For MU, the likely short squeeze kicked in to reverse the stock prices +0.80% in the following 4 weeks for every 1% increase in daily short volume share (short volume/daily volume) (Table 1).
Since Micron’s stock prices have been consistently traded below (40%) street analysts’ estimates (Figure 1), the market’s “self-correcting” ability should be taken into consideration. That is, a large mispricing should follow with a reversal in stock prices. Therefore, an inverse relationship is expected between today’s mispricing and next period stock return. Figure 2 shows such a pattern.
In light of Trump’s 25% tariffs and more than 50% revenue exposures from China, MU potentially has a lot to lose. (The actual tariffs effect will be discussed in a separate article.) Additionally, given potential Chinese retaliation tariffs and China’s determination to develop its own semiconductor sector, this may explain why Micron’s stock still fell off the cliff after the break of the tariffs news. It is estimated that the tariffs event has decreased Micron’s stock by more than 2% (Table 1).
Put All of Them Together
There is enough evidence that daily MU stock prices have been affected by each of the above factors. However, it also makes sense that the impact of each factor is interrelated. For example, short sale typically increased around ER surprises and in response to significant mispricing. In order to draw a road map for MU’s stock price movement, the net effect from all these factors needs to be considered simultaneously.
To this end, I correlated the future one-month MU returns with all the current metrics simultaneously. I used revenue (earnings) surprise as the difference between actual revenue (earnings) and revenue (earnings) estimate. Daily short volume and total option contract volume are used to measure traders’ impact. I also included mispricing as a control variable to measure the market’s self-correction tendency to the fair value of the stock. Stock mispricing is measured by the percentage difference between actual stock price and analysts’ median price target. All data was obtained from either Bloomberg or company’s 10-Qs. The information used is available for verification upon request.
In short, Table 1 summarizes the net impact of each factor on future stock price movements. The fundamental measures such as revenue surprise and earnings surprise all produce an expected and significant positive impact, albeit with different magnitudes. Other non-fundamental factors also produced a predictable impact as explained in the above section.
MU Stock Prices One Month Ahead
The above is not just an academic exercise to verify how MU’s stock prices were determined. Using these relationships (Table 1), I was able to forecast MU’s future price trajectory. In Figure 3 below, the predicted MU prices are computed and compared to the analysts’ target prices, which are often used as measures of stock fair values. As street analysts are notoriously slow to react, the prediction power is obviously lower, and the resulting error is much larger than the model predicted prices. Finally, I used the model and calculated MU’s future daily price moves 20 days out and showed that the price level should be around $60.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.