The coronavirus outbreak has cast a pall of gloom over chip stocks in recent trading sessions. After starting the year off on the right foot, the semiconductor sector has taken a beating of late as the epidemic has started affecting key technology players such as Apple (AAPL 2.14%).
The iPhone maker's reduced revenue guidance for the current quarter has sparked panic among investors as it indicates that the chip recovery that was anticipated to take place in 2020 might be delayed. Not surprisingly, high-flying chip stock Micron Technology (MU 4.37%), which relies on the likes of Apple and has strong exposure to China, is witnessing a sell-off along with the entire sector.
But this recent pullback could be an opportunity for investors looking to buy Micron Technology stock as the industry it operates in seems to be on the verge of a turnaround.
A potential turnaround is in the cards for Micron this year
Micron Technology had a forgettable 2018 thanks to a downturn in the memory industry, but signs of a turnaround last year helped it deliver big gains in the stock market. The good news for Micron investors is that memory market conditions are expected to keep improving as the year progresses.
For instance, Micron's NAND flash business (which accounts for 28% of revenue) is already turning around. The company witnessed a low-single-digit sequential jump in the average selling price (ASP) in the NAND business during the fiscal first quarter. What's more, NAND flash shipments were up 30% annually. The good news for Micron is that NAND flash prices are expected to jump 40% in 2020, according to DigiTimes.
Micron expects NAND flash demand to improve in 2020 thanks to the launch of 5G (fifth-generation) smartphones. Micron management pointed out on the latest conference call that the 5G phones launched so far have carried an average of 500GB of NAND storage, far outpacing the 80GB of average storage capacity Counterpoint Research estimated for the end of 2019.
What's more, Micron also expects a jump in mobile DRAM capacity. The company expects affordable 5G smartphones to carry an average of 6GB of mobile DRAM, while an average device could come equipped with 8GB of RAM. The current iPhone line-up carries 4GB of RAM.
The adoption of 5G smartphones will be a tailwind for Micron's business on the whole in the coming quarters. Gartner predicts 5G smartphone sales could hit 221 million units in 2020, leading to a 3% increase in overall smartphone sales after last year's decline. The firm added that 5G smartphone shipments might jump to 489 million units in 2021.
This means demand for Micron Technology's products could rise as the year progresses. Of course, the outbreak of coronavirus can be expected to delay the opportunity. But investors shouldn't forget that 5G is the next evolution in wireless technology and it will eventually be rolled out on a big scale and create demand for new smartphones.
Supply constraints should be a tailwind
At the same time, the supply of DRAM and NAND is expected to remain constrained in 2020 as major suppliers have already hinted they will keep production in check. On the conference call, Micron added that it expects bit supply growth to be lower than demand growth thanks to a check on capital expenditures.
Investors should remember that Micron stock could remain volatile in the near term thanks to its strong exposure to China. The chipmaker reportedly got 57% of its revenue from the Chinese market in fiscal 2018, and the coronavirus outbreak is bound to cause some short-term pain.
However, demand-supply balance in the memory industry can be expected to tilt in Micron's favor once again, and prudent investors should use the recent pullback in Micron stock as an opportunity to buy more shares. In the long run, Micron could become a growth stock once the headwinds disappear.