Micron stock has lost momentum on AI bubble fears: buy, sell, or hold?

Micron stock price has plunged and entered a local bear market after falling by over 22% from its all-time high.

It slipped to $975 on Thursday, its lowest level since June 11, after a series of negative news. So, is this the start of a new downtrend or just an overreaction?

Micron stock dived after a series of negative news

MU stock price has pulled back sharply after some negative AI news. Major news came from Bloomberg, which reported that Meta Platforms was planning to sell its excess computing capacity.

This report implied a few things. For example, it could be a sign that its vast AI spending is not leading to strong revenue and profitability growth.

If this is the case, the company will likely slow its expansion, a major move since it is one of the top hyperscalers.

It could also mean that the company has identified a new business opportunity of building data centers and leasing the extra space. Such a move would be highly opportunistic and would possibly lead to more spending over time. 

SpaceX has perfected this business model and has inked several major deals recently. It will receive over $1.2 billion a month from Anthropic, $150 million from Reflection AI, and $925 million from Google. Meta may see a similar windfall over time.

Micron stock also sank after a group of PC makers launched a lawsuit accusing the company and its peers of price manipulation.

At the same time, Apple is putting pressure on the US government to allow it to buy memory from Chinese companies. 

Apple argues that such a move will help it maintain the same prices of its products instead of hiking.

Still, it is unclear whether it will receive this authorization as memory companies will likely boost their lobbying efforts. Some Senators, including Tom Cotton, have warned about such a move.

Micron’s fundamentals and valuation are attractive

On the positive side, Micron has the fundamentals that may help it continue doing well. For example, its recent earnings showed that its revenue jumped by over 300% in its third quarter, reaching over $40 billion. These are huge numbers considering that the company made over $37 billion in annual revenue last year.

The company also boosted its forward guidance and expects to make $50 billion in its fourth quarter.

Analysts predict that its annual revenue will reach over $129 billion this year, followed by $236 billion in the next financial year.

This growth has coincided with its strong margins, with the gross margin now exceeding 80%.

As such, one would expect such a company to trade at a premium. Instead, Micron trades at a forward PE multiple of 13.30, lower than the sector median of 24.

This multiple is likely because investors remember what happened in 2023 when its revenue dropped by more than half as memory prices plunged.

MU stock price technical analysis

Micron stock chart | Source: TradingView

Technicals suggest that the Micron stock price has some more downside to go. It peaked at $1,246 recently and formed a shooting star candlestick pattern. 

At the same time, the Relative Strength Index (RSI) has dived from the overbought level of 82 to the current 48. That is a sign that the stock has formed a bearish divergence pattern.

The stock is substantially higher than the 100-day moving average of $706.

Therefore, there is a risk that mean reversion will drive it lower in the near term. If this happens, the stock may drop to $800 and then resume the uptrend as the fear eases.