(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
The shares of Micron Technology Inc. (MU) have dropped by almost 27% from their highs. But the stock may reverse, and technical analysis suggests the stock may rise by more than 9% over the short term from its current price around $45.75. Options trades show that the stock may rebound as well over the next couple of weeks.
The rebound may not last long because analysts have been slashing their forecasts since the company issued disappointing fiscal first quarter guidance in the middle of September.
Technical Break Out
The technical chart shows the shares of the chip maker entrenched in a long-term downtrend since the stock peaked in late May. Now the stock is rising above technical resistance at $45.50. Based on that technical breakout the shares could increase back to the upper end of the trading channel around $50 over the short term. (For more, see also: Micron's Stock Poised to Fall 9% Short Term.)
The relative strength index is still trending lower since peaking at overbought levels well over 70 in March. It suggests that momentum is likely to continue leaving the stock over the longer term.
Options traders are betting the stock rises by expiration on October 19. The options at the $50 strike price have seen an increasing level of activity. The open interest has risen to over 96,000 open call contracts up from 70,000 on September 17. A buyer of those calls would need the stock to increase to at least $50.30 to earn a profit an increase of about 9%.
But analysts have been reducing their forecast for the coming fiscal first quarter 2019. Over the past month, analysts have slashed their earnings estimates by over 5% to $2.96 per share while revenue has dropped by almost 5% to $8.1 billion. (For more, see also: Micron Stock May Drop Further on Slashed Forecasts.)
The forecast for the full year has dropped too. Analysts now see earnings falling by over 11% from a previous estimate for a decline of 3%. Revenue forecasts have dropped as well and are seen growing by less than 2% from earlier estimates for growth of 7.5%.
That is not all because the price target has dropped by over 13% since the start of September to an average of around $68.60. That target is almost 50% higher than the current stock price suggesting it may still be too high.
All the uncertainty around Micron’s earnings and revenue may make it difficult for this stock to rise over the longer term.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.