Of all of the battleground stocks out there in tech, Micron (MU) is perhaps the most contentious. That's because when a chip stock sells at less than five times earnings your thinking is that it represents a tremendous bargain. How can it not?
I know that any time I express any concern about Micron I am going to get blasted for it on Twitter (TWTR) because it is so cheap and because, bizarrely, it is a cult stock, one that goes up and up and up until it stops and then gets real ugly...fast.
Now, I have traded or followed Micron for 25 years and I have a lot of contextual analysis of the stock. I know that it's at its most vulnerable point when it sells at its lowest multiple on future earnings because that's the market telling you that it is actually expensive because those earnings estimates won't be reached.
Perhaps, in fact, they will be halved and Micron's selling for 10 times not five times what you thought.
Can the market be wrong? Of course, it can. Micron's had a low multiple on routinely ratcheted numbers for ages as the price of DRAMs has defied gravity. Some of that is because demand is off the charts for personal computers, work stations, notebooks and data centers. Some of it is because these are now more complex chips and the usual foundries you need to make DRAMs to meet demand can't be built as quickly or as cheaply as they were in earlier days. So, the supply is being outstripped by rapacious customer ordering.
Micron has a second business, flash memory, which, at one point, was as tight or tighter than DRAMs but that's no longer the case. There is excess inventory in the channel and the pricing has not been able to hold up.
There's a lot of suspicion that the same thing has to happen with DRAMs but it just hasn't and the two cycles are very much separate.
Now, here's the deal: I do not want Micron to go down as so many people on Twitter seem to think I do. I am simply warning people that it might not be as cheap as it looks, something I am saying about Facebook (FB) as it has a very low multiple on next year's earnings too, about 18x, at least relative to its 40% growth rate. No one is disputing me on the possibility of Facebook's numbers coming down. So it is a little odd that there is such critical sound and fury about my explanation for why Micron's stock has been sliding since it reported that blow out quarter - at least until yesterday that is.
Why am I so mindful and wary? Bethlehem Steel, that's why. Bessie was, at one time, the second biggest steel company in the world. But it ran into trouble in the 1990s with too much debt, wrong products, overpaid work force top and bottom, and a lack of demand for its product lines.
None of that was evident, though, in the late 1980s, when the company was coining money at a ferocious pace. In fact, there was a moment when Bethlehem Steel's profitability was rising so fast that it looked like the stock was selling at two times next year's earnings. Some of the most important analysts in the stocks were saying you simply had to buy it because what could go wrong at two times next year's numbers?
Well, a lot.
In reality, not only were the estimates for that next year's earnings radically too high, but in two years the company was actually losing money! That's right, losing money. The big boom in earnings? It never occurred as the dollar got strong, other countries started dumping steel into our country to meet and then sate the demand, and many of the big infrastructure and ship building contracts never came through. Bessie, a high cost producer, was eviscerated by dumping and, while it held on for another decade, ultimately ceased to exist and its biggest foundry became a casino.
Now, you may hate me for being worried about a low multiple semiconductor stock that may actually make the numbers. But don't hate me for my knowledge base. Micron's a much better company than Bessie ever was. That's not the point. All I am concerned about, all I am trying to do, is teach people the fallacy of the low multiple theorem that says you can't possibly lose money when pe's are so low. They are often a signal of an imminent earnings collapse.
And while I hope DRAM pricing stays strong and I want so badly for flash memory to rise back up, I just want you to know my intentions: I don't want you to lose money. That's my only dog in this Micron hunt.