Jim Cramer discussed in a recent Mad Money segment whether Micron Technology, Inc.’s (NASDAQ:MU) current run is different from its cyclic highs and lows in the past.
The discussion was prompted by the recent upgrade by Bank of America Corp (NYSE:BAC) of Micron Technology, Inc. (NASDAQ:MU) from Underperform all the way to Buy. In the report that was published on Wednesday, analyst Simon Woo also raised the price target for the stock from $22 to $40. The bank noted in its report though the stock has “strongly” moved up (33% YTD), they see further upside because of the solid chip pricing environment with tight supply and cost competitiveness.
On Wednesday, Cramer cited that the stock rallied 5% because of the upgrade. Cramer noted that this is noteworthy because Woo has always been bearish about Micron Technology, Inc. (NASDAQ:MU) saying that prices had to collapse for what is basically a commodity product.
Cramer explained that the company makes DRAM (Dynamic Random-Access Memory) chips which are basically needed in every computer unit. This market niche, the CNBC host noted, has always been notorious for being a boom and bust industry. Why? Because as demand picks up for computers and subsequently DRAMs, prices go up. After prices go up, a firm will always break rank and build new capacity. As other firms follow suit, the market goes to equilibrium but then eventually plummets. Consequently, stocks in the industry go from trending up to being crushed.
According to Cramer, every time he discusses something positive about Micron Technology, Inc. (NASDAQ:MU), he is reminded of this cycle. Citing massive gains and massive losses of the stock in the past, the host said that it seems the current Micron run is different this time. After bottoming at $5 in October 2012, the stock has been continuously rising and closed $31 on Wednesday, he said.
Why is this run different that the previous runs? Cramer noted that the great depression and the shift it has stimulated in terms of thinking in this industry is the cause. There used to be many DRAM manufacturers, Cramer pointed out, with Japanese players, SK Hynix and Samsung Semiconductor in Korea. The Japanese players then formed a partnership and put up Elpida Memory. Elpida has since collapsed and Micron Technology, Inc. (NASDAQ:MU) bought the company in 2013. The Elpida acquisition has caused a constraint on capacity which in turn has stabilized prices for DRAMs.
This has broken the cycle in this industry, Cramer hints. Furthermore, he noted that as people see in the stock of Intel Corporation (NASDAQ:INTC), there is a resurgence in demand for devices that need DRAM modules. Cramer then said that there is a possibility for ballooning profits in the sector as demand increases prices while manufacturing costs go down.
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Shareholders in Micron Technology includes Seth Klarman’s Baupost Group which reported about 51.66 million shares in the company by the end of March 2014. This stake was valued at about $1.22 billion. Another investor is David Einhorn’s Greenlight Capital which had about 44 million shares in the company by the end of the first quarter. The firm’s stake was valued at about $1.04 billion.