Micron Technology (NASDAQ:MU) has been on a roll in 2016. Is the stock due for a terrible correction next year?
Let's have a look at Micron's chances of having a record-level difficult year in 2017.
Shares of the memory-chip maker have plunged at least 45% in three of the last 10 years. That includes a 62% plunge in 2015. Going back even further, the dot-com crash led to Micron shares losing 76% of their value in 2002. By those standards, it would take a horrific drop indeed to qualify for the "all-time worst" dishonor.
As far as Micron's financial statements go, the company recently closed the books on a historically tough fiscal year. In fiscal 2016, revenue dropped 23% year over year. Operating profit fell from $3 billion to $168 million for a 94% reduction. EBITDA profit took a 45% haircut to land at $3.1 billion, and unadjusted earnings fell from $2.47 per share to a negative $0.27 per share. Trailing free cash flow was brutally negative, to the tune of $2.6 billion.
All of these figures are among the worst Micron has seen in the last decade. However, the stock has not followed the same trend. Micron's share price has gained 60% year to date.
And therein lies the key to how Micron might do in 2017.
What's going on?
Micron's stock gains in 2016 are based on improving market trends. In an industry where average selling prices per chip are in a near-permanent state of free fall, 2015 marked the start of another deadly price war. We already saw the effect of this on Micron's financial results. But memory-chip prices not only stabilized in 2016 -- they actually increased dramatically.
In the earnings call for the recently published first-quarter results of fiscal year 2017, Micron CEO Mark Durcan laid his cards on the table.
"Prices have been strengthening on a like-for-like basis across all leading edge DRAM and NAND products and we see this trend continuing into the current quarter," Durcan said. "To give you some perspective on pricing dynamics, after declining for roughly 18 months, PC DRAM ASPs [average selling prices] are up 50% to 60% compared to the trough pricing, driven by an improvement in demand, historically low inventory levels and the impact of supply shifts to other segments."
Other types of DRAM chips have bounced back a bit slower than the PC products, because they saw smaller declines to begin with. In the NAND flash market, a shifting product mix drove average selling prices down 10% year over year, while gross margins expanded significantly.
In 2017, management expects demand to grow faster than supply in both the DRAM and NAND markets. That could hold unit prices steady all year long.
Could Micron run into trouble in 2017? Sure it could. The market winds can always shift at the drop of a hat. Chip prices could indeed start plunging again, knocking out all support for 2016's gains.
But it's fair to say that Micron's management has a clearer view of current market trends than most of us outsiders, and it would be silly to set up high expectations if the real market data points in a darker direction.
And even if Micron falls victim to yet another oversupply surge followed by the next memory-chip price war, the blow would still have to be an insanely crushing one before it reaches a low-record level. In fact, I would be downright shocked to see 2017's financial results falling beneath the low bar that was set in 2016.
So 2017 is very unlikely to become Micron's worst year yet. It won't even be the worst year in recent memory, even in the most pessimistic case.