Option Trade
Micron Technology, Inc. (NASDAQ:MU) Calls
Tuesday, September 12, 2017

** OPTION TRADE: Buy the MU JAN 19 2018 35.000 CALL at approximately $2.60. Place a pre-determined sell at $5.20.

Note: No protective stop losses added -- but if you wish to do so make it $1.05.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

by Ian Harvey   

Internet of Things and artificial intelligence is on the rise – and this time of year is also a profitable time to be a tech-focused investor, as this space has been among the strongest performing sectors all year.

Companies powering the technologies necessary for the likes of Apple and Microsoft – is the semiconductor manufacturers --that have had a strong year on the markets.

One such company at the forefront of this growth is Idaho-based Micron Technology, Inc. (NASDAQ: MU), a memory chip manufacturer, which has been in consolidation mode for the past three months, but is up on the year by 49%.

Micron is one of the leading worldwide providers of semiconductor memory solutions. The company's memory solutions are marketed towards customers in a variety of industries, including computer manufacturing, consumer electronics, and telecommunications.

Micron stock is one of Wall Street's most talked about. This is owed directly to the company's incredible growth rates on the top and bottom lines. In fact, the current consensus estimates are calling for quadruple-digit EPS growth and 80% sales growth this quarter.

Another catalyst for Micron is the scheduled earnings report it will deliver in the next two weeks, on September 26.

Micron Technology is focused on reducing costs and increasing value-add solutions in its product mix in its attempt to leverage the current uptrend in the memory market. Micron earns 64% of its revenue from DRAM (dynamic random access memory) and 31% from NAND (negative AND) memory. It serves four major end-markets: computing and networking, storage, mobile, and embedded.

A supply shortage in the DRAM market has spiked DRAM prices, driving Micron’s overall revenue for the past four quarters. Moreover, Micron started volume production of 3D NAND at a time when supply was short in the NAND market, which accelerated Micron’s revenue growth over the past two quarters.

In fiscal 3Q17, Micron’s revenues rose 20% sequentially to $5.6 billion, driven by a 14% increase in DRAM ASP (average selling price) and a 17% increase in NAND bit volumes. The company reported sequential revenue growth in all four end-markets, with the largest growth (27%) coming from the storage segment.

Micron’s computing and networking revenues and mobile revenues more than doubled on a YoY basis in fiscal 3Q17. The company is now focusing on its storage business as more data centers adopt AI (artificial intelligence).

Micron’s sequential revenue grew faster than Samsung’s (SSNLF) memory, which grew 15%. SK Hynix grew 6%, and Intel’s (INTC) memory grew 1%. On a YoY basis, Micron reported the highest revenue growth of 92%, while Samsung, SK Hynix, and Intel reported revenue growth of 65%, 70%, and 58%, respectively.

For fiscal 4Q17 (ended August 2017), Micron expects to report revenues in the range of $5.7 billion–$6.1 billion, which is higher than the consensus estimate of $5.62 billion.

Mizuho Securities analyst Vijay Rakesh expects Micron to report earnings on the higher end of its guidance—or even exceed the guidance. Rakesh stated that DRAM contract prices rose 5%–6% in June 2017–July 2017, while NAND prices rose 2%–5% during the same time period. This increase in pricing could increase Micron’s revenue 5% sequentially, even if it sees no growth in bit volumes.

However, fiscal 4Q17 is a seasonally strong quarter that sees normal seasonal growth of 10%–11% in bit volumes, and Micron’s transition to 1x DRAM and 64-bit NAND has increased its bit output. Both these factors are likely to increase sales bit volumes, and higher volumes and prices could drive Micron’s revenue above $6 billion in fiscal 4Q17.

Influencing Factors

Micron Technology recently presented at the Citi 2017 Global Technology Conference , debunking the ideas and arguments of a slump or a downward cycle in the business.

Ernie Maddock, senior vice president and chief financial officer, believes the demand for both DRAM and NAND will stay strong during fiscal 2018. He cited the need for data storage and data processing as the key drivers of growth.

The management expects the DRAM and NAND bit growth to be around 20% and 40% for fiscal 2018; demand growth will be in line with the bit growth, according to Maddock.

This eradicates fears relating to worsening demand and increasing supply in the industry. Micron is set to grow in the year ahead amid decent demand growth along with stable supply growth.

Drivers of demand are server and mobile as the primary drivers of growth. M2M and autonomous vehicles are also expected to fuel the demand side. Demand from servers remained strong during fiscal year 2017; it was toward the higher end of the company's guidance for 2017.

According to Maddock, the big driver for server demand was the massive amount of data that is being used to form business intelligence. This is, in fact, driving hyperscale growth.

Also AI is an important trend. It will sustain demand going forward. In the short term, though, the use of data for business intelligence is driving the demand growth.

China is the most cited reason for the expected future bit growth. Further, supply growth of ~40% in NAND also adds to oversupply concerns.

According to Micron's management, supply is expected to remain in line with the demand; it won't surpass demand.

Micron Technology is looking to leverage the changing memory market to maximize its profits. This requires a fresh perspective, and that’s exactly what its new CEO (chief executive officer) is expected to give to the company.

Sanjay Mehrotra is the former CEO of SanDisk, which was acquired by Western Digital (WDC). Mehrotra took the helm of Micron in April 2017, after Mark Durkan retired. After just four months, Mehrotra has brought in three people from SanDisk.

Analysts and Hedge Funds Opinions

FBN Securities'Shebly Seyrafi  yesterday morning initiated coverage of the DRAM and NAND chip maker with an Outperform rating, and a $45 price target, writing that as part of the "triopoly" of suppliers left in the DRAM market, and only a handful of NAND makers, Micron is poised to benefit from much lower volatility in pricing.

Even though micron may be at or near "peak" gross profit margin of 48%, writes Seyrafi, and even though prices may not grow as much over the next several quarters as they have the last several, still, the company is poised to keep benefitting from the change in economics in the business, with Micron now splitting the DRAM market with Samsung Electronics (005930KS) and SK Hynix (000660KS)

Morgan Stanley analyst Joseph Moore Despite has set a $36 price target for Micron, as he believes that the stock price could go higher, despite the increase in supply and the cooling of memory prices. Moore stated that even though the memory supply shortage is easing, major computing and clouds customers expect supply conditions to remain tight through 2017.

Moore too stated that cloud companies expect the memory supply to remain tight through 2018, and he expects Micron stock to strengthen until the end of 2017—and then to return to average run rates in 2018.

Stifel’s analyst Kevin Cassidy is bullish on Micron, seeing strong potential for the company in the data center market. Cassidy stated that as the data center world transitions from “CPU (central processing unit)-centric systems to data-centric systems,” the demand for more memory content per device increases. Memory demand would thus outpace microprocessor demand.

Cassidy also stated that Micron has a technology and cost advantage in 3D NAND (negative AND), which could help it tap the transition to data-centric systems. Hence, he believes that Micron could grow faster than microprocessor companies like Intel and Advanced Micro Devices (AMD).

Wall Street analysts have raised their consensus price target for Micron Technology (MU) stock from $38 in June 2017 to $40 in August 2017. However, the bullish price target was raised significantly from $60 in June 2017 to $75 in August 2017.

Harvey’s Options Volatility Indicator


The memory industry is changing as cycles disappear amid the need to process and store data. Applications like automotives and M2M are also driving the growth. Memory isn't a PC-only business now. Data centers and servers space will continue to fuel the demand for memory.

Moreover, Micron's dedication to technology advancement bodes well for the company. Overall, Micron remains a buy amid growing DRAM and NAND demand matched by stable supply and resulting price and low valuation.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..


** OPTION TRADE: Buy the MU JAN 19 2018 35.000 CALL at approximately $2.60. Place a pre-determined sell at $5.20.

Note: No protective stop losses added -- but if you wish to do so make it $1.05.


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