The share price of semi-conductor chip manufacturer Micron (MU) has declined more than 50% in the past eight months. The forward PE ratio of Micron is 6.8. Thus, the current share price of about $11.30 looks cheap.
Another argument that goes in favor of investment in Micron is that the company, considering the investments made in the recent past, would be able to trim the production cost per-bit quicker than the decline in the price of DRAM.
However, there are other factors, which indicate that the recovery is not going to happen soon.
Firstly, the PC market is currently very weak and no-one in the tech field expects a recovery before the end of this year. Thus, the DRAM market remains oversupplied and consequently the price of memory chips continues to fall. Secondly, the smart phone units are expected to register only a single-digit growth this year. Such a scenario continues to hurt the prospects of Micron. Thirdly, much to the disappointment of analysts, the sales of NAND memory is yet to recover. Under these circumstances, the company had announced its intention to invest further in the production capacity of NAND memory. Fourthly, some Chinese companies have expressed their interest to enter the memory chip manufacturing business.
MicronTechnology
Even if the price of DRAM declines as much as it fell last year, the company would still not benefit because of the production costs. Considering the investments in the 20nm manufacturing process and the planned giant leap to 1Xnm technology, the manufacturing cost is expected to reduce between 15% and 25% only in the fiscal 2017. While there are no doubts that the memory chip market will continue to register 20% long-term growth, the economic slowdown has temporarily restricted the capacity growth.
In the fiscal 2015, Micron recorded a decline in revenue to $16.192 billion, from $16.358 billion in the corresponding period of fiscal 2014. The net income for the fiscal 2015 declined to $2.89 billion or $2.47 per share, from $3.045 billion or $2.54 per share in the similar period of 2014.
The trend continues in the fiscal 2016 as well. In the first quarter of fiscal 2016, the company reported a 36% decline in net sales to $3.35 billion. The net income for the first-quarter of fiscal 2016 was $200 million or $0.24 per share, compared to $1.003 billion or $0.84 per share in the first-quarter of 2015. The company missed the revenue estimates of analysts. Thus, considering the arguments, it can be understood that the stock will remain range bound with bearish bias in the coming weeks.
Technically, the long-term price action continues to remain within the declining channel. The short-term trend price action remains constrained within the horizontal lines drawn through the levels 11.58 and 9.45.
Micron Stock Price: March 16th 2016
Thus, a trader should look into the possibility of purchasing a put option contract with expiry ranging from two to four weeks (mid-April). A strike price of about $10 would enable the trader to capitalize on the decline quickly.
