Pros and Cons for MU Stock
Investors who bet on microprocessor stocks a few years ago made fortunes, but then the entire industry fell into a slump last year. Companies like Micron Technology, Inc. (NASDAQ:MU) are currently trading at huge discounts, meaning there is significant upside on tickers like MU stock.
So what was the big weight that dragged down the microprocessor stocks? Simple: the big problem was a slowdown in computer and laptop sales. Customers weren’t seeing their paychecks get any bigger, yet for some reason analysts expected them to continue buying new smartphones and tablets.
The stocks were priced to reflect unrealistic, unlimited growth. Obviously, that meant those stock prices would eventually crumble under the weight of fewer sales, but no one really knew what would happen next. Well, I have been reaching out to a variety of well-placed sources, trying to find out.
From everything I’ve heard (and believe me, I keep my ear to the ground), there seems to be a consensus that microprocessors could rebound. Here are three of the biggest reasons why:
The Internet of Things
This is one of the biggest technology trends of the next decade. It could influence almost every household item we use in the next 10 years or so. Thermostats, house alarms, coffee makers: all those items are likely going to be WiFi-enabled soon.
What that means is that they have to be fitted with the type of microprocessors we normally find in smartphones and tablets. Naturally, that means additional business for companies like Micron. It could easily become a large portion of their business within the next few years. That would mean that MU stock’s share price could surge to its previous levels of $20.00, $30.00, or even $40.00.
Although the Internet of Things could send MU stock skyrocketing in the medium-term, it isn’t likely to have an impact this week.
That has to come from someplace else entirely. Last year’s wave of consolidation might be exactly the right tailwind to send the industry soaring again. Last year was nearly another record year for mergers and acquisitions in the sector, mostly because of fear. Avago bought Broadcom (and took its name) for $37.0 billion, Intel absorbed Altera for $13.7 billion, and Dell put a whopping $67.0 billion on the table for EMC Corporation. (Source: “Chip Makers Swept by Wave of Consolidation,” The Wall Street Journal, October 18, 2015.)
These were the biggest of almost 300 deals in the microprocessor space. While there had been an even higher volume of deals in 2014, I don’t think the dollar values are even close to the deals made in 2015.
The executives at these firms thought size would be an important factor in survival. By pairing up with a rival, firms could effectively gain the scale needed to out-price the competition, while hopefully leaving a less crowded field for the future. All this consolidation is going to wipe out the smaller players in the market. So even if the pie is no longer growing, at least each firm will get a bigger slice.
Microprocessor stocks had two ways to survive the bloodbath of 2015. The first is mergers, but Micron didn’t take that path. Sure, it paid $3.2 billion for the remainder of Inotera’s DRAM division, but that was far less than what other microprocessor companies did. Micron took the “road less travelled” by deciding that it could best prepare for the future by innovating.
Believe it or not, that was pretty far down the list of priorities for most players in the industry—but not Micron. The company’s management understood that not all segments of the industry were facing oversupply issues. If Micron got an early foothold in some of those segments, then MU stock would be poised for massive growth.
That’s why it was so encouraging to see Micron announce a breakthrough last year. The company invented a chip that, according to reliable sources, is 1,000 times faster than anything we’ve ever seen. (Source: “Intel, Micron Claim Chip Breakthrough,” The Wall Street Journal, July 28, 2015.)
The Bottom Line on MU Stock
If Micron really has developed a “superchip,” then it could become the hottest supplier to electronics manufacturers. No consumer-facing company would risk falling behind in the speed and efficiency of their devices, so it would be a natural shift toward the best technology. That is Micron’s endgame.
In all reality, I would wait another quarter or two before betting the farm, but there are certainly reasons to believe that Micron stock can rebound.