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No Joke: This Semiconductor Giant's Shares Fell 33% Despite Plenty of Good News

Anders Bylund, The Motley Fool

Shares of memory chip titan Micron Technology (NASDAQ: MU) have plunged 32.6% lower since the end of May. That would have made sense if the stock was overvalued to begin with and/or the company ran into several major speed bumps along the way.

But that's not what happened.

Instead, Micron shares started out from a deep-discount price-to-earnings ratio of 7.2 times trailing earnings and kept plunging all the way down to a P/E of 3.6, all due to worries about another major price war in the memory chip sector.

And the hits keep coming. This Tuesday, for example, Micron enjoyed a credit rating upgrade while an insider report pointed to recently falling memory prices stabilizing in a hurry. Ignoring all of that, Micron shares fell 2% lower on a generally flat market day.

This is getting downright silly. It's high time to start a Micron position right now or add to your existing holdings while the discounts last.

Thumbs-up and thumbs-down gestures in front of an uncut semiconductor wafer.

Image source: Getty Images.

Why Micron's share prices keep dropping

It's no secret that the memory chip market has been prone to wild swings over the years. Every two-year period of steady chip prices and rising stock charts across the industry used to be followed by a year or two of massive oversupply, plunging chip prices, and brutally negative profits for Micron and its peers.

Skeptics insist that it isn't different this time. Chip prices have been far too stable for far too long, and the next big plunge must be at hand. And it's true that steady or even rising chip prices have been replaced by a mild downtrend in recent months. That was enough to trigger Micron's dramatic price drops.

Reasons to believe in a new world order

There are far fewer players in the memory sector these days because the last few cyclical swings simply destroyed the weaker hands. A trio of winners -- Micron, SK Hynix, and Samsung (NASDAQOTH: SSNLF) -- ended up buying many of their former rivals at pennies-on-the-dollar bankruptcy discounts.

So a heavily fragmented marketplace has turned into a nearly monopolistic sector, controlled by just three major players. Each one of these companies arguably has the power to stop any hint of a price war in its tracks by simply reducing their manufacturing output for a while. There are no weak players left to root out of tiny niche markets.

Here's the new reality: Even if Samsung wanted to start another downturn in the memory market by flooding it with massive production volumes, SK Hynix and Micron would be sure to pull their own reins tighter until the bleeding stopped.

It really is different this time.

Fresh evidence

Weak demand for smartphones has been tilting the supply-demand equation in the wrong direction for our memory makers recently, but that pain shouldn't last long. This week, Bloomberg's usual cadre of anonymous insiders said that market leader Samsung is considering a lower memory-chip production volume in 2019.

And a couple of soft quarters would hardly kill Micron. In fact, credit ratings veteran Moody 's just upgraded the company's senior unsecured credit from Ba2 to Baa3 -- a two-notch jump that takes Micron out of the "speculative" end of the credit pool and into the "investment-grade" segment. Moody's likes the way Micron paid down 37% of its long-term debt during the fourth quarter of fiscal year 2018 alone. The ratings firm also agrees that chip prices are enjoying a more elastic kind of stability these days, all thanks to the hands-on supply controls that Micron and its frenemies are using.

The upshot: Micron is a great buy right now

We're talking about an established market leader in a large and increasingly flexible industry. Its shares have received a tight-cropped haircut in recent months as investors largely ignored the newfound market strength -- and several solid earnings reports along the way.

At this point, Micron's stock is just getting too cheap to ignore.

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Anders Bylund owns shares of Micron Technology. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .