Micron (MU) stock is moving up in a big way on Wednesday morning as bullishness builds on a semi rebound, but the crescendo of green is increasing the conviction of skeptics that the surge will be short lived.
Shares ran nearly 15% to the upside shortly before mid-day after the Sanjay Mehrotra-led company cleared its low bar on earnings and encouraged optimism on the normalization of supply and demand in memory. The move has quickly shifted the stock's trajectory after a rapid erosion in recent months.
But a number of vocal analysts and investors are calling for caution on those eager to buy the semiconductor stock amidst its Wednesday morning leap.
For one, this is a familiar story that management is telling.
"In early April, the company had erroneously signaled a bottom in the inventory cycle -- and the shares spiked higher," Seabreeze Partners president Doug Kass commented on Tuesday. "The semiconductors in general -- and Micron in specific -- face a continuing inventory glut, which is unlikely to be resolved soon."
Fool me once, as they say.
Kass included Micron as a top pick to short earlier this year, and, after booking significant gains in 2019 so far, is considering re-entering a short position amid the rapid run in shares.
What's interesting is the market's choosing to ignore the actual numbers contained in Micron's Securities and Exchange Commission filings. Inventory has steadily increased over the past year and continued to increase sequentially as well.
"Not only are we no closer to a market clearing price, the gap would seem to have widened, based on the inventory analysis," Morgan Stanley analyst Joseph Moore noted. "Better demand should eventually slow the producer inventory builds, but we don't see it reversing in 2020, at least in DRAM. With that backdrop, we don't see a strong case to buy the stock at prices higher than book value."
In that context, the leap on Wednesday is at least overdone, if not largely irrational.
Contrasting Comments
The faulty forecast in the previous quarter from Micron is not only concerning based on the trust the market can place in Mehrotra's outlook, but also in that it contradicts the supply-and-demand-dynamics forecast by Broadcom (AVGO) CEO Hock Tan.
In March, Tan said his company was likewise expecting a second-half recovery in memory demand and a roll-off of the oversupply that has lingered over the industry. Yet, this was dampened only a few weeks ago.
"We had expected a recovery," Tan said earlier this month, in a somber earnings call that stood in sharp contrast to Micron. "However, while enterprise and mainframe software demand remained stable, particularly in North America and Europe, with respect to semiconductors, it is clear that the U.S./China trade conflict, including the Huawei export ban, is creating economic and political uncertainty and reducing visibility for our global OEM customers."
"As a result, demand volatility has increased and our customers are actively reducing inventory levels to manage risks," he added. "This leads us to believe the second half of 2019 will be more in line with the first half as opposed to the previously expected recovery."
While it is worth pointing out that Mehrotra noted his company's ability to work around the tariff impact, his contradictory outlook from Broadcom's comments make things a bit murkier. This is especially so as Mehrotra's choice to call out the agencies whose rules the company is skirting is likely to incur increased scrutiny from those very entities.
With the uncertain action in the stock, many are looking for Mehrotra to prove his bullish comments before bidding bullishly on shares.
"There is plenty of traffic in the $38 to $40 range to keep a lid on the shares in my opinion. Should the stock price fail at this spot, return ticket to the $32-ish area would not surprise," Real Money contributor Stephen "Sarge" Guilfoyle commented on Wednesday morning. "My opinion is this. As an investor, I am unconvinced, so I sit on my hands."
In the end, a long-term investor can't be blamed for picking up on Micron; the long-term secular demand for semiconductors in a more horizontally integrated tech economy is difficult to deny. The question is whether Micron stock is moving too much, too quickly as promises of full scale rebound still fail to materialize.
As such, it might be best not to chase the stock amidst Wednesday's wild swing.
