By Mott Capital Management
The struggle for Micron (NASDAQ: MU) stock may not be over just yet. The stock has fallen significantly since its peak in April, and all signs point to an even deeper decline. It has been reported several times now that memory prices have been falling and may continue to fall.
DigiTimes has noted that DRAM prices have fallen several times, noting that the weakness may continue in the fourth quarter. This is noteworthy because falling memory prices will adversely affect Micron's gross margin. Micron stock has been highly correlated with changes in gross margin.
The DRAMeXchange DXI index, which tracks DRAM price and production trends, shows recent weakness in memory chips and how it relates to Micron stock.
In fact, the stock price almost predicts changes in gross margins, and based on current stock trends, it looks like Micron's gross margins will decline in the coming quarters. This cycle would be interesting if margins were to fall because the peak margins for this cycle did not exceed the peak of the previous cycle. However, the share price is up significantly, which could lead to a deeper pullback over the next six months.
expects margins to rise to 46.9% in the fourth quarter of fiscal 2021, which the company will report on September 28. Meanwhile, margins are expected to be 49.05% in the first quarter of fiscal 2022. Margin expectations for the first quarter have fallen from a peak of 49.25% on August 27.
Options traders are betting the stock will continue to fall as well. Open interest in the $68 put increased by 16,800 from September 9th to September 24th. These contracts expire before the earnings date. This suggests traders expect the stock to fall on quarterly results. Data shows traders are paying about $0.70 per contract, which would require the stock to trade below $67.30 if held until expiration, which would be a drop of about 6% from the current price of about $72.50.
9 More put bets were seen on Micron on Nov. 10, with open interest on the $75 put increasing by 16,800 contracts on Nov. 19. The data shows that the put options were purchased at $5.83 per contract. Additionally, 16,000 contracts of the $75 call option were sold on November 19 at $3.51 each. Traders paid a total of $2.32 per contract, betting that the stock price would trade below $72.65 by expiration.
html Options expiring in September are likely bets on the stock falling before the results are announced, as Micron has 39 analysts covering it, with 9 calling it a strong buy, 23 calling it a buy, and 7 calling it a buy. hold. The average analyst price target is $114.34, which is nearly 56% higher than the current price. If memory spot prices are falling and continue to fall, one would imagine that the stock will receive multiple downgrades and the price target will be lowered. Buyers of September options clearly believe the stock will fall into these downgrades.
Micron's big support is at $70, and if the stock falls below $70, it could drop lower, possibly as low as $58, where there is a technology gap that needs to be filled. The RSI is in a clear downtrend, indicating that the stock is not done declining yet. Adding to this bearish outlook is the fact that the stock has made several attempts to rise above $75, but all have failed.
All of this suggests that, at the very least, the road ahead may be very turbulent. If DRAM spot prices fall and remain weak, it would explain why the stock has been struggling for months.
