Shares of memory chipmaker Micron (NASDAQ:MU) rallied nearly 120% this year as surging demand for memory chips lifted market prices to multi-year highs. But even after that rally, Micron looks surprisingly cheap at six times next year's earnings, and analysts expect its revenue and earnings to respectively rise 23% and 56% this year.

Those numbers make Micron look like a screaming buy, but investors shouldn't get greedy with this stock just yet. Here are four key issues to consider before buying Micron's stock at these historic highs.

A stick of DRAM memory.

Image source: Getty Images.

1. Memory prices are near a cyclical peak

Micron controls 22% of the global DRAM market, according to TrendForce. That makes it the third largest player after Samsung (NASDAQOTH:SSNLF) and SK Hynix, which respectively control 46% and 32% of the market. Micron also controls 13% of the NAND market, putting it in fourth place behind Samsung, Toshiba, and Western Digital (NASDAQ:WDC).

Tighter supplies and surging demand boosted prices for both DRAM and NAND chips over the past year. However, those prices are peaking, and research firm Gartner expects prices to plummet in 2019. That would be great news for OEMs and consumers since cheaper components equal cheaper devices and higher margins, but it would torpedo Micron's core business. That's why analysts expect Micron's revenue and earnings to respectively dip 0.2% and 11.5% next year.

2. Market consolidation strengthens the competition

The memory chip market is currently undergoing some major consolidation. Western Digital, which previously purchased several smaller NAND makers, closed its acquisition of SanDisk last year.

Toshiba, meanwhile, which was struggling to cover losses at its US nuclear power unit, agreed to sell its memory chipmaking unit to a consortium of companies led by Bain Capital and SK Hynix in October. Those big mergers could make it tougher for Micron to keep pace in terms of scale and production costs. On the bright side, Micron still has the backing of its longtime partner Intel, which could help it keep pace with its bigger rivals with newer 3D NAND and 3D Xpoint technologies.

3. One (or more) companies will ramp up production

Memory chip prices are currently at multi-year highs because the big players aren't ramping up production yet. Once one of these companies does, the dominoes will fall as supply is rebalanced with demand.

Micron has stated that it won't boost its DRAM capacity for the foreseeable future, and plans to concentrate on shrinking its die size to remain ahead of the tech curve. However, Samsung's recent opening of the world's biggest chipmaking plant indicates that it plans to ramp up its production. SK Hynix also recently stated that it will start boosting its DRAM capacity. As these supplies rise and drive down prices, "pure plays" like Micron will be hurt much more than diversified tech giants like Samsung.

4. The concerns about China

Last year, Micron's then-CEO Mark Durcan warned that China could flood the market with cheaper memory chips as it invests more heavily in its domestic semiconductor industry. China's state-backed Tsinghua Unigroup notably tried to buy Micron two years ago, but the deal was abandoned due to US regulatory concerns.

But that hasn't stopped China from trying to gain access to Micron's tech. Earlier this year, there were two separate cases of Micron's trade secrets being leaked from Taiwan to Chinese chipmakers by disgruntled employees. These cases indicate that China is dead serious about releasing its homegrown memory chips, and that Durcan's dire predictions could come true.

Why you shouldn't get greedy

The right time to buy Micron was in mid-2016, just as the previous boom-and-bust cycle in memory prices reached its trough. But with memory chip prices now approaching a cyclical peak, it's reckless to expect Micron to replicate its gains from the past year. Therefore, Micron might be a good short-term play for the next few months, but I wouldn't consider it a safe long-term investment.

 

Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends Gartner and Intel. The Motley Fool has a disclosure policy.