Investors in Micron Technology (NASDAQ: MU) experienced a modest reprieve on Friday as the stock rose 2.5%, following a cumulative decline of approximately 20% this month. However, when viewed over a longer timeframe, the data reveals a more encouraging trend. Despite recent selling pressure, Micron’s stock has risen about 208% since the beginning of this year; if viewed over the past three years, the gain exceeds 1,220%.
These returns rewarded investors who held onto this memory chip giant throughout the artificial intelligence boom. However, an investor using the pseudonym Oriental Trader believes Micron’s success may tempt investors to overlook risks that have repeatedly caught semiconductor enthusiasts off guard.
“It’s time to sound the alarm,” warned Oriental Trader.
This warning is not saying that artificial intelligence will suddenly no longer need memory chips, but rather that the enthusiasm surrounding AI has led investors to believe that the industry’s historically unpredictable profit fluctuations are behind us.
The investor noted that a fundamental characteristic of memory chip manufacturing is that companies must invest billions of dollars in production facilities before knowing exactly how much product their customers will ultimately need.
When demand is strong, manufacturers have strong incentives to increase production capacity. However, these investments may eventually lead to a chip supply that exceeds what customers are willing to buy, thereby lowering prices and profit margins.
In Oriental Trader’s view, even though demand for advanced high-bandwidth memory remains strong, the current enthusiasm around AI does not eliminate this possibility. “AI is a cycle engine, not a cycle ender,” the investor said.
The investor also questions whether the industry’s concentration among Micron, Samsung, and SK Hynix can prevent the next downturn. Competition for customers may prompt these three manufacturers to expand production simultaneously, thereby undermining their current pricing environment.
The long-term supply agreement provides some protection, but Oriental Trader believes that if market conditions deteriorate, customers may seek to modify these arrangements.
Micron's seemingly attractive valuation may be misleading, as its surging profits could be nearing a cyclical peak, making the stock appear cheaper than it actually is.
“It’s the perfect time to sell cyclical stocks when everything looks great and the P/E ratio seems low,” said the investor.
Ultimately, given that Micron's stock price remains significantly above its level at the beginning of the year, Oriental Trader believes investors should consider taking partial profits rather than assuming good times will continue indefinitely. Therefore, this trader has assigned a "Sell" rating to Micron's stock. (To view Oriental Trader’s historical records, click here.)
However, Wall Street still sees several compelling reasons to be bullish on Micron. The stock currently holds a consensus “Strong Buy” rating, with 28 out of 29 analysts recommending a buy and only one maintaining a hold. The average price target is $1,621.67, indicating nearly 85% upside potential over the next 12 months. (See MU stock forecast)
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