Micron Stays Bullish on Strong Memory Chip Demand Outlook

Micron Stays Bullish on Strong Memory Chip Demand Outlook
September 26, 2017

 
In our September 7th report, we had forecast a rally in the stock of memory chip manufacturer Micron Technology (NASDAQ: MU). Additionally, we had mentioned our plan to invest in a call option. The stock was trading at about $32 at that time. A week later, the stock hit a high of about $35 and our option expired in the money. Notably, the stock has made 64% gains in 2017, versus 12% gains of S&P 500. For the past one week, the stock has been consolidating at $35 levels. We anticipate another rally in the share price due to reasons given below.

Investment research firm Susquehanna upwardly revised the FY17 estimates of Micron to earnings of $1.87 per share on revenues of $6.1 billion. Previously, the firm had estimated a full-year 2017 earnings of $1.82 per share on revenues of $5.93 billion. The company has beaten Zacks estimates in the past four-quarters with an average positive earnings surprise of 23.1%. Zacks has estimated that Micron would register an earnings growth of 32.2% in 2018. The long-term earnings per share growth is expected to be 10%.

The company acquired Taiwanese chip maker Inotera in December. That is expected to result in operational benefits for the company. Looking ahead, the acquisitions of Rexchip and Elpida (re-christened as Micron Memory Taiwan Co., Ltd. and Micron Memory Japan Inc., respectively) will increase Micron’s dominance in the memory chip market.

In fiscal 2018, analysts expect the average selling prices of DRAM to decline between 12% and 14%. Likewise, the price of NAND chips is expected to fall by 25%. However, Micron has already announced that DRAM and NAND chips’ “bit costs” would decline by high single digit and 28%, respectively. That would work in favour of Micron.

According to DRAMeXchange, global DRAM supply is expected to grow by less than 20% in 2018, as all the three major players have slowed down on their capacity expansion plans. New fabs that are planned for mass production will not be ready until 2019. That would assist the continuation of the current strong demand for memory chips.

On the basis of the continued strength in the memory chip market, Susquehanna has reaffirmed the positive rating on the stock, while upwardly revising the price target from $40 to $50.

Similarly, underlining a strong pricing scenario, analysts at Deutsche bank have reiterated a buy rating on Micron and raised the price target from $37 to $42. Thus, we forecast the bullishness to continue in the short-term.

The stock continues to move within the ascending channel, as shown in the price chart below. While the on balance volume makes new highs, the oscillator of moving average is moving above the zero level. That confirms bullishness in the scrip. The immediate support for the stock is at 34.50.

Micron - Technical Analysis - 26th September 2017

A call option is ideally suited to trade the uptrend. Before proceeding to invest in a contract offered by a binary broker, we would look for a strike price of about $35 and a contract expiration date around October 4th.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.

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Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.


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