Micron Technology (MU -0.14%) appears well-positioned within the semiconductor industry. The memory chips produced by the company will likely bolster the latest technologies over the next few years, leading to significantly higher demand for its products.
Nonetheless, Micron stock offers essential lessons in the difference between a company and its stock. It also touches on a critical part of investing that shareholders rarely discuss. These could call the investment thesis of Micron stock into question despite the company’s performance.
Why Micron will prosper as a company
To understand Micron stock, investors should differentiate the stock from the company. The company competes in the memory chip segment of the semiconductor industry. This means it does not compete with chip designers like Nvidia or manufacturers such as Taiwan Semiconductor.
Instead, about 70% of its revenue comes from the DRAM (dynamic random access memory) chip market. As the memory that supports applications, it plays a critical role in supporting PCs, smartphones, data centers, and other products. Its chips will also go into cutting-edge applications such as artificial intelligence (AI), virtual reality, and the Internet of Things. Hence, in this segment, its only major competitors are Samsung and SK Hynix.
It also derives around one-fourth of its revenue from producing NAND flash memory. This is long-term storage memory, an area with significantly more competitors.
Amid the current downturn in the chip industry, Micron has slashed spending on property, plant, and equipment. Those expenditures fell by 25% in the fiscal first quarter of 2023 ended Dec. 1, 2022.
However, spending will likely ramp up once the industry cycle turns upward again. To this end, Micron plans to invest about $100 billion over the next 20-plus years to build a chip factory in upstate New York.
The problem with owning the stock
Admittedly, that expansion has helped Micron stock, but it may also point out the stock’s contradictions. Over its 39-year history, Micron has beaten the S&P 500. And amid the higher chip demand driven by AI and other technologies, bear markets are not undoing all of Micron’s bull market gains.
That was not always the case. Between 1995 and 2016, cyclical downturns wiped out all the stock gains during the growth cycles. This made Micron a frustrating stock to own. Moreover, the latest growth cycle took Micron to a 52-week high of more than $98 per share. Still, that barely exceeds the dot-com bubble high of $97.50 per share in 2000.
More importantly, with such behavior, stockholders often forget the emotional aspects of investing. Shareholders face the constant temptation to buy when prices are high and sell when stocks go through a significant sell-off. Consequently, even the most risk-tolerant investors will struggle to endure a 21-year period without net gains.
For now, the down periods of Micron stock compare well to those in other parts of the semiconductor industry. This is because newer applications have led to massive increases in demand for memory chips. Hence, as the industry recovers, Micron could double your money.
Nonetheless, once growth in those industries levels off, Micron could enter another extended period of no net gains. That arguably makes Micron more of a trade than a long-term investment.
Making sense of Micron stock
Given Micron’s position in the DRAM market, it will probably play a critical role in advancing the world’s latest technology. Unfortunately, that process may be too wild a ride emotionally for its shareholders. The fact that Micron experienced no net gains over 21 years could push the limits of even the most patient shareholders.
Indeed, tech’s emerging industries could easily drive outsized returns in the long term. However, given most investors’ limited ability to endure volatility, it will likely be easier to own semiconductor stocks outside of the memory chip industry.
Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.