Micron Technology Stock Is Overvalued Amidst a Weak Pricing Environment

Shares of memory chipmaker Micron Technology (NASDAQ:MU) stock have sold off despite posting better than expected fourth-quarter results.

However, weaker-than-expected first-quarter guidance compelled investors to unload shares.

Investors are concerned over the rising supply in the sector and its peers’ massive capital spending, which points to lower memory prices in the future.

Hence, analyst targets for MU stock appear to be way too high at this stage, and investors should be in no rush to scoop up this chipmaker.

MU stock has been remarkably volatile since the beginning of the year. The stock went as high as $97 in April but has lost a considerable amount of its value since then. It trades just shy of $67 today.

Overall, MU stock has shed over 15% of its value since the start of the year. However, analyst price targets point to at least 50% over its current price. Considering the state of Micron’s business environment, a 50% upside is wishful thinking at best.

Worrying First Quarter Guidance

Micron recently reported its fourth-quarter results, where its revenues shot up 36% to roughly $8.3 billion. Net income rose 175% higher to over $2.7 billion during the period.

For the full year, revenues rose 29% to $28 billion compared with 2020. The incredible sales growth allowed net income to grow by 116% to $5.9 million.

However, what had investors concerned was its relatively weak first-quarter guidance. The company expects revenues to be at $7.4 billion to $7.8 billion, with earnings per share at $2 to $2.2 per share. The guidance was well below expectations, with revenues expected to be at roughly $8.6 billion and earnings of $2.58 per share.

Based on the first-quarter guidance, it appears that the company is looking at flat margins. Another concerning element is that Micron hasn’t put any projections apart from the first quarter, pointing to more struggles in the future.

A recent DigiTimes article talked about how memory chip producers were under duress to offload their inventories. Samsung (OTCMKTS:SSNLF) and Western Digital (NASDAQ:WDC) among others have been urging companies to more chip deliveries, suggesting that a buyers’ market is inbound.

Hence, it appears the memory chip prices are likely to come under pressure in the foreseeable future.

Moreover, a substantial slowdown in orders and dynamic random-access memory (DRAM) contract prices are expected to decrease significantly in the fourth quarter. This would follow a 20% drop in the previous quarter.

With the current shortfall, chipmakers such as Micron have started to expand capacity at an aggressive pace. The company plans to spend $11 billion to $12 billion in Capex next year.

This is significantly higher than the $9.7 billion apportioned in 2021. On top of that, its competitors in Samsung will be spending $205 billion in foundry expansion and production development in the next few years.

The massive increase in Capex means that a supply increase in the chip industry will result in downward pressure on prices.

MU stock is more dependent on chip pricing than other semi-conductor stocks such as Intel (NASDAQ:AMD). Hence, it is likely to struggle in the short term.

The stock prospered during the pandemic when there was a memory chip shortage. However, with the pandemic headwinds fading away, things will likely get tougher for MU stock and its peers.

Final Word on MU Stock

MU stock has sold off after a worrying first-quarter update. The supply-demand imbalance for memory chips is likely to have a negative impact on the company margins.

The absence of an update beyond the first quarter points to a tough year ahead for Micron and the broader industry.

MU stock will continue shedding its value, so it’s best to wait for a better entry point to invest in the stock over the long term.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.