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Micron: A Strong Buy for Your Portfolio in 2014

May 06, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

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A recent report on the scenario of the DRAM market by Nomura was received well by the investors of Micron (MU) as it predicted a tight supply of chips for PCs and mobile devices in coming months which translates into lucrative opportunities for the chipmaker. The surge in production of smart devices across the globe has resulted in better demand for DRAM chips.

Additionally, it is encouraging to see that the prices of DRAM chips have sustained at their current level even when the production at SK Hynix facility (read the story here) has resumed at regular capacity level.

Do Not Worry About Insider Selling

Of late, there has been heavy insider selling in Micron which is generally an indication of dull future prospects for the company. Though it is not a hard and fast rule that the company’s share price is going to take a dip in the near future, it arouses certain concerns in the minds of the investors. Let us take the case of Micron itself. This is the chart that shows the insider selling at Micron for the past four months (including April):

Month

Insider Selling (No. of shares)

January 2014

963,492

February 2014

125,200

March 2014

32,000

April 2014

726,499

As is clearly visible from the table, April is the first month that saw heavy insider selling activity after January, which also saw a massive amount of insider selling. However, in the past three months, the share price of Micron has grown from a range of between $22 to $23 to $26 to $27 (current price range) implying a modest capital appreciation of 18%. The point I intend to drive home is that while insider selling can be taken as a measure to understand the future prospects of the company, investors should be cautious before taking any action out of panic.

Reasonable Results in Q2

A few days back, Micron reported results for the second quarter of 2014 with revenue of $4.1 billion and a GAAP net income of $731 million. The company also reported solid numbers on the cash front with free cash at $85 million based on operating cash flow of $1.39 billion and capex of $562 million. The gross margin improved to 34% on the back of the growth in ASP (average selling price) of DRAM chips complemented by a growth in demand. On the DRAM demand and supply conditions, the management anticipated wafer production to go down at mid-single digits in 2014. However, it also reiterated its belief in the forecast five-year DRAM demand CAGR to remain in the mid 20% to 30% range thereby signalling a relatively stable market.

A View on DRAM

In the month of July in 2013, Micron completed a highly strategic acquisition of Elpida in order to increase its supply capacity of DRAM chips and foothold in the market. The amalgamation of Elpida’s operations with Micron have proved favorable for the latter as Elpida has brought companies like Apple Inc. on board Micron’s mobile memory product portfolio. Going ahead, this merger could prove to be an extremely positive decision for the company because of growing smartphone adoption across the globe.

Besides the demand for DRAM chips, the ASP of DRAM is expected to stay flat for coming quarters as pointed out by industry experts. Though it could have a certain impact on Micron’s numbers, it is not a major reason to worry. In fact, the ASP in DRAM industry has remained flat for the past couple of quarters, but an increase in demand for DRAM chips has compensated well for that stagnancy. As I mentioned earlier, it is pleasantly surprising to see that the ASP has sustained at similar level in spite of the fact that Hynix’s Wuxi facility is back on track with production.

NAND Is Another Pillar of Growth

While there is scope of reasonable volatility in the DRAM markets, the NAND market is the one that can give robust growth to Micron in the near future. In the second quarter, trade NAND gross margins were in the high 20% range, a decrease of 5 percentage points quarter-over-quarter. This number was approximately 20 percentage points lower than one of Micron’s biggest competitors in this space, Sandisk (SNDK).

For the investors of Sandisk, a recent move by Samsung (SSNLF) to pull out of 3D NAND ramp would have brought some relief. This is because Sandisk does not have any concrete plans around entry into the 3D NAND market till the next year while competitors Samsung and Micron have already begun working in this direction. However, it is important to keep in mind that Sandisk continues to be a leader in 2D NAND technology.

The influx of Solid State Drives (SSD) technology has pumped up the demand for NAND memory chips and accordingly, Micron is in the process of improving its production mix from cards/components to creating solid solutions for the enterprise SSD customers. The company is still in the process of converting its Singapore facility from DRAM to NAND, which would add the required capacity for meeting the rising demand.

Buy Is the Word

In conclusion, I would like to point out that even though there has been reasonable insider selling in Micron, it is a fundamentally strong company that has huge opportunities ahead in DRAM and NAND flash markets. Hence, it is an ideal candidate for your portfolio in 2014.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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