Can MU Stock Survive?
Investors are deeply scared of emerging trends in microprocessors, causing a lot of damage to firms like Micron Technology, Inc. (NASDAQ:MU). MU stock has plummeted even further on fears of a slowdown in China and geopolitical tensions in the Middle East, but those perspectives are all rooted in short-term thinking.
In large part, the decimation of Micron stock reflects a fear of the unknown.
For decades, the truism known as “Moore’s Law” applied—with stunning precision I might add—to the microprocessor industry. It said that the number of transistors per microprocessor would double every two years or so, meaning that computing speeds should grow exponentially.
That observation, noted by the co-founder of Intel Corporation, underpinned a technological revolution that gave us smartphones, tablets, and high-efficiency laptops. Unfortunately, that rule is starting to break down and we don’t know what comes next.
This is what has investors terrified.
Bad News on Two Fronts
Adding more transistors to chips simply isn’t yielding the same gains in speed, meaning Moore’s Law is broken.
Grand plans for the next step in technological evolution, like the “Internet of Things” (IoT), assume we’ll have the necessary computing power, but that may not be the case.
The microprocessor industry is the tip of the spear. Without it delivering constant improvements, other firms can’t build data-heavy software applications to power the IoT revolution.
And that’s only half the problem.
There are simply too many players in the microprocessor industry. The market has become oversaturated, as firms pop up across the globe, eagerly riding the trend. Increased supply has driven down the price of microprocessors. With revenues getting crushed and the chips themselves showing fewer improvements, the industry looked ready for a crash. Consolidation became one of the only ways to salvage the value of a firm.
Avago Technologies Ltd bought Broadcom Corporation in what was, at the time, the largest merger in the sector’s history. However, it was later eclipsed by Dell Inc. scooping up EMC Corporation for $67.0 billion. Mergers reassured the market that these companies could afford to produce at scale, thus protecting their market share. (Source: “Chip Makers Swept by Wave of Consolidation,” The Wall Street Journal, October 18, 2015.)
Micron took a different strategy, though. Rather than buddy up with another firm facing the same issues, Micron devoted resources to research and development (R&D). Even in the face of falling revenue, the company spent almost 12% more on research in the last quarter than it did in the same period one year ago.
Why MU Stock Could Rebound
What is Micron trying to achieve with this focus on R&D? Well, it’s about trying to find a cure to what ails the industry, as opposed to simply finding shelter from the storm. If Micron can develop a chip that brings processing speeds to the next level, the company could vault itself to the forefront of the industry.
Yet research only seems like a good idea after it yields a breakthrough. Investors take a dim view of courage until the results become visible, which is why Micron stock got hammered this year. However, those of us who were paying attention to the innovation strategy noticed a breakthrough that could save MU stock and the industry at large.
In late July, Micron and Intel announced a new memory chip that functions at 1,000-times the speed of regular microprocessors. (Source: “Intel and Micron Produce Breakthrough Memory Technology,” Intel Newsroom, July 28, 2015.)
While the chips haven’t become widely available yet, the innovation could make MU stock the hottest commodity of 2016.