Option Trade 
Micron Technology, Inc. (NASDAQ:MU) Calls 
Wednesday, December 21, 2016

** OPTION TRADE: Buy the MU FEB 17 2017 20.000 call at approximately $1.80. Place a pre-determined sell at $3.60.

Note: No protective stop losses added -- but if you wish to do so make it $0.75.

by Ian Harvey

Wednesday, December 21, 2016

Expectations are high as memory chip manufacturer Micron Technology, Inc. (NASDAQ: MU) releases its earnings data after the market closes today, Wednesday, December 21st.

Analysts see Micron growing revenues 18.1 percent to $3.96 billion for fiscal first quarter, feeding a 16.6 percent improvement to earnings to 28 cents per share. Expect a beat-and-raise quarter to continue MU shares' momentum into year's end.

Semiconductor stocks have been in a tear in 2016, with the PHLX Semiconductor index up 36 percent, led by standout performances such as Advanced Micro Devices' ( AMD) 271 percent surge and Micron's 43 percent return.

MU's gains have been a case of supply and demand in DRAM and NAND flash memory. DRAM prices, which had dogged MU for a two-year stretch starting in early 2014, have snapped back this year. Moreover, tight supply was expected to send PC DRAM prices more than 30 percent higher during its fourth quarter, according to DRAMeXchange, which also projects supply bit growth to hit all-time lows in 2017. Similarly, NAND supply is expected to be tight thanks to an industry transition from 2D NAND to 3D NAND.

Micron Technology Inc. stock’s 50 day moving average price is $18.83 and its 200 day moving average price is $16.08. The stock’s market cap is $21.20 billion. Micron Technology Inc. has a 1-year low of $9.31 and a 1-year high of $21.00.

Influencing Factors

Micron has invested significantly toward building its physical infrastructure, with property, plant and equipment costs rising 39% year-over-year in the third quarter. However, MU stock also saw a sizable dip in overhead costs, while simultaneously pumping up its research and development. This is smart and effective fiscal management.

Micron offers both DRAM and NAND products. While DRAM chips are the key components in PCs, NAND flash chips are crucial for portable electronic devices.

The recent optimism surrounding the stock can also be attributable to the company's recently raised outlook for the first quarter of fiscal 2017. The guidance update was driven by improvements in average selling prices (ASP), particularly for DRAM. The company also revealed that while overall demand continues to be healthy, industry supply growth will be sluggish over the next few quarters.

Furthermore, the company is expected to benefit from strong demand for NAND flash memory chips, which are used in smartphones and tablets. Driven by new tablet products and greater adoption of solid state drives (SSD), total demand in the NAND flash memory industry could surpass manufacturing capacity, leading to a periodic shortage and in turn, higher pricing in the near term.

It should be noted that Micron has been expanding in SSD storage due to the decline in the PC market. This is because SSDs are much faster and energy efficient than traditional hard drives. They are also used in servers due to lower latency, thereby facilitating faster response to real-time applications.

In an effort to expand its SSD product portfolio, last year, the company partnered with Seagate Technology plc STX to supply a significant portion of the latter's NAND requirement. In return, Seagate shares its SAS SSD technology with Micron - a key technology that the latter lacks in the enterprise SSD market. We believe that the deal will expand Micron's high-value enterprise SSD portfolio.

Additionally, Micron recently announced that it has completed the acquisition of the remaining stake in Taiwan's Inotera Memories Inc. for approximately $4 billion. The move is expected to be immediately accretive to Micron's DRAM gross margin, earnings per share and free cash flow.

According to the company, the acquisition will also have some operational benefits, leading to efficient management of investment levels and cadence, followed by alignment with global manufacturing operations.

Analyst Input

Micron Technology has been assigned a $24.00 price target by equities research analysts at Susquehanna in a research note issued on Sunday. The brokerage currently has a “buy” rating on the semiconductor manufacturer’s stock. Susquehanna’s target price indicates a potential upside of 17.97% from the company’s previous close.

Other equities analysts have also recently issued research reports about the stock…..

  • Vetr raised shares of Micron Technology from a “buy” rating to a “strong-buy” rating and set a $25.50 price target for the company in a research note on Wednesday, December 7th.
  • Loop Capital started coverage on shares of Micron Technology in a research note on Tuesday, December 13th. They issued a “hold” rating and a $25.00 price target for the company.
  • Deutsche Bank AG reissued a “buy” rating and issued a $20.00 price target (down previously from $24.00) on shares of Micron Technology in a research note on Monday, November 28th.
  • Cowen and Company boosted their price objective on shares of Micron Technology from $22.00 to $23.00 and gave the stock an “outperform” rating in a report on Wednesday, November 30th.
  • Finally, Nomura boosted their price objective on shares of Micron Technology from $23.00 to $25.00 and gave the stock a “buy” rating in a report on Wednesday, November 30th.

Three equities research analysts have rated the stock with a sell rating, six have assigned a hold rating, twenty-six have given a buy rating and two have given a strong buy rating to the company. The stock has a consensus rating of “Buy” and a consensus price target of $19.92.

Harvey’s Options Volatility Indicator


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

** OPTION TRADE: Buy the MU FEB 17 2017 20.000 call at approximately $1.80. Place a pre-determined sell at $3.60.

Note: No protective stop losses added -- but if you wish to do so make it $0.75.

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