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Micron Technology Looks Like a Solid Long-Term Bet

June 14, 2014 | About:
kcpl

kcpl

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Micron Technology (MU), a supplier of flash memory to Apple (AAPL), is on a roll this year. The stock has jumped by almost 35% and is trading close to its 52-week high. There’s a substantial recovery in memory chip prices and solid demand for its products this year. Also, the company's performance has improved due to the consolidation in the flash memory industry and the acquisition of Elpida.

Although at its 52-week high, Micron still looks to be a good investment as chip prices are expected to remain strong. Moreover, the increased production of the next-generation iPhones can drive Micron to new highs. Let's have a closer look at Micron's prospects and see why the company is a good investment option despite its strong run in 2014.

More improvement ahead

The solid operational execution of Micron, along with favorable industry and market conditions should enable better performance moving ahead. However, the wafer production is expected to remain soft in the dynamic random access memory, or DRAM, segment due to DRAM to NAND conversion. Moreover, shrinkage in total industry bit supply growth is expected by the chipmaker in 2014.

Micron expects industry supply growth to be in the low 20% to 30% range even beyond 2014, driven by relatively stable wafer output and a slowdown in process technology migration. The demand and supply situation continues to remain favorable for Micron looking at the five-year DRAM demand forecast that is expected to be in the mid 20% to 30% range.

Therefore, the DRAM segment is believed to achieve robust results with steady revenue and gross margin expansion later in the year. The chipmaker is also focusing on providing its key server customers with unique solutions to help differentiate their products. Some major networking clients are working with Micron to improve bandwidth performance and benefit from different trends such as cloud and datacenter growth and LTE roll out. Moreover, some other key growth drivers include the company's involvement in hybrid memory computing enablement and DDR enablement.

Also, the cutting-edge NAND process technology of Micron is expected to achieve robust growth. The company is increasing yields of its 20 nanometer and industry-leading 16 nanometer technologies. These smaller form factors are expected to drive demand for its products as they are more efficient in nature, consuming less power and delivering better performance.

The graphics business of the company is also gaining traction as the company shipped more than 100 million gigabits in the past quarter. Also, GDDR5 product of Micron was qualified by a key customer with the company illustrating positive yield improvement on its 25 nanometer process.

A big opportunity

Apple provides the most significant growth opportunity to Micron. Micron won the Apple account and supplied memory for the iPhone after acquiring Elpida. Apple is on track to launch the iPhone 6, which is expected to arrive in September, and is estimated to carry cutting-edge technology such as a LiquidMetal chassis and sapphire display. Moreover, the iPhones are speculated to be bigger this time as per the rumors, since Apple is trying to get a hold of the market for larger-screen devices.

Therefore, Apple is expecting great demand for the device, and it might produce as many as 80 million units of the iPhone 6 this year. Going forward, Micron should gradually see an upswing in its business and revenue gowth, as Apple increases production of the iPhones.

Conclusion

The trailing P/E ratio of 11 and a forward P/E ratio of 9 make Micron a very cheap stock, especially considering that its bottom line is expected to grow at a compounded annual growth rate of 13% for the next five years. This is impressive as compared to the historical five-year average growth rate of just 2.7%. So, Micron is still a good buy even though it trades at the higher end of its 52-week range.


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