Micron Technology (NASDAQ:MU) stock continues to ride high, so much so that Micron recently came within $1 per share of its all-time high set back in the 2000 dot-com bubble. This optimism has stemmed from a chip shortage so severe that it has idled production in numerous industries. However, chip shortages rarely last, and a link to cryptocurrencies could alter the value proposition of Micron stock.
Chip market dangers
Admittedly, Micron remains firmly positioned in a memory market as more products require such chips. Many see the company’s situation as a big reason why you should be buying Micron.
The shortage could particularly benefit Micron in the DRAM memory market, where South Korean chipmakers Samsung and SK Hynix are its only competitors. DRAM made up about 68% of Micron’s revenue in 2020. Additionally, the company claimed about 23% of the global DRAM market, according to TrendForce.
Still, investors have to remember the notoriously cyclical nature of the memory chip market. One particular concern is the effect of cryptocurrency on the chip market.
According to The Financial Times, the fixed costs involved with mining Bitcoin (CRYPTO:BTC) stand at about $5,000. Bitcoin trades at a little more than $43,000 as of the time of this writing, leaving miners willing to pay top dollar for chips.
However, the adverse effects of the mining process on the environment has turned some investors against crypto. One former Bitcoin bull, Tesla CEO Elon Musk, suspended the acceptance of Bitcoin due to energy consumption concerns related to the mining process.
Investors may also recall that when the last major crash in Bitcoin occurred in 2018, the memory chip market turned from a shortage to a surplus quickly. As a result, Micron earned 55% less in fiscal 2019 (which began in September 2018) compared to the previous year.
Memory prices and Micron stock
This creates a problem for Micron due to the stock’s notoriously cyclical nature. In the Financial Times interview, CK Chung of Nomura Holdings estimated that the chip shortage should last through the end of the year. Assuming Chung’s forecast proves correct, it could reduce revenue and profits for Micron in 2022. That may explain why Micron’s last earnings release did not provide guidance beyond the upcoming quarter.
Also, crypto mining has become a significant influence on Micron stock. During the 2018 cryptocurrency crash, Micron stock lost more than half its value from June to December as memory chip demand crashed.
Moreover, Micron stock has a history of massive declines going back to the mid-1990s that resulted from memory chip gluts. One memory chip surplus took Micron stock to a low of around $2.60 per share in March 2009.
With memory chips now going into smartphones, artificial intelligence (AI), and Internet of Things (IoT) applications, chip demand has experienced a permanent increase. For this reason, Micron will likely not become a penny stock again.
Micron stock sells for around $78 per share as of the time of this writing, approximately 20% below its 2021 high of $96.96 per share. Moreover, Bitcoin’s current price of about $50,000 comes in around 20% below the recent high of just over $63,700.
Admittedly, that is likely not enough of a price decline to deter crypto miners. Nonetheless, Bitcoin has a history of price declines of 80% or more. If another such drop has begun, it could easily pressure Micron stock.
Micron stock in one year
Given the chip shortage, Micron stock looks like a buy. However, Micron has traded near its all-time highs recently has historically acted as a proxy for memory prices. In recent years, that demand has developed an increasingly strong link to the mining of Bitcoin and other cryptocurrencies.
Moreover, a prominent chip analyst believes the chip shortage will have ended by the new year. That could bode poorly for this semiconductor stock in 2022 if more available chips lead to lower prices.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.