For years, Micron Technology, Inc (NASDAQ:MU) was dead money. Then in late 2012, MU stock’s 50 DMA surpassed its 200 DMA to the upside and that sparked a near 500% rally that lasted approximately two years. What happened next was a correction that wiped out 70% of those gains in Micron stock from the day its 50 DMA fell below its 200 DMA to the downside. Given that NVIDIA Corporation (NASDAQ:NVDA) is on a very similar path, NVDA stock owners should take notice of this performance.
With that said, the technicals are nice to look at, but what’s more important is what caused the rally and sell off in Micron stock. Micron Technology manufactures DRAM and NAND, two types of memory. The prices for DRAM and NAND are largely determined by supply and demand.
In 2013, prices for the commodity soared. This caused Micron’s revenue and net income to jump 80% and 155%, respectively, over 2012. MU stock followed suit.
The problem is that oversupply became a reality with the rise in prices, and that led to a rapid change in 2015 where revenue and profits both declined significantly. This essentially explains the volatility in MU stock, a security that has recovered some in 2016 thanks to diminished competition.
What does MU stock have to do with NVDA stock?
The point in discussing Micron stock is to illustrate what can happen to a security following a sudden turnaround in its business. In the 9-years prior to 2016, NVDA stock was essentially dead money. Nvidia Corporation is a chipmaker who competes with the likes of AMD and Intel. It’s a business that has not been all that exciting until last year.
Not only did chipmakers see a turnaround in their businesses during 2016, but Nvidia stood-out as the company gained market share in traditional PC and gaming graphics chips. In the process, Nvidia Corporation has touted its potential in new markets like AI. However, the success up until this point can be attributed to more traditional markets like PC and gaming chips.
We believe this reality could put Nvidia stock owners in a very similar situation as Micron stock owners in 2015. Currently, expectations are sky high coming off a quarter where revenue of $2 billion reflected growth of more than 50%. This performance was the result of a 63% rise in gaming graphics chips to $1.2 billion, driven by increased demand for a new Nintendo.
As we have seen in the past, demand for gaming consoles fade fast. When that happens, Nvidia’s earnings won’t look as great year-over-year. While NVDA stock owners point to the company’s outlook in new markets, it is important to remember the underlying cause of Nvidia’s growth to this point, gaming and PC chips.
This is a cause for concern as Nintendo demand fades in 2017, and competitors like AMD and Intel launch new lines of high performance chips in the data center and AI space in 2017. When you consider these two factors, it is very possible that Nvidia will soon reach the equivalent of 2014 for Micron Technology.
Yes, NVDA stock may continue to trade higher as the factors that led to recent gains are still very much in place. However, if you are sitting on triple digit gains, there’s no reason to be greedy. Just ask MU stock owners who learned the hard way.