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Can This Chip-Maker Take Your Portfolio Returns Higher?

July 11, 2014 | About:
Vijay Mehta

Vijay Mehta

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Chipmaker Micron Technology (MU) has delivered an exceptional performance in the past months resulting in a surge of around 140% over the last year. The company, which supplies flash memory for computing applications, servers, and smartphone companies such as Apple (AAPL), has solid prospects ahead. There are a good number of factors to show that the company is poised to grow in future on the back of favourable industry conditions and let’s analyse if these growth catalysts are enough to get you invested in Micron.

Solid quarterly results

Before Micron’s third quarter results, analysts were expecting terrific growth in Micron's sales and earnings. Its revenue was expected to jump almost 68% year-over-year to $3.9 billion resulting in expected earnings $0.70 per share, a massive improvement over the $0.04 per share it earned in the year-ago quarter.

Micron successfully delivered on the expectations and the investors seemed to be euphoric after the solid results as the stock price went up in trading after the earnings. In Q3, Micron reported revenue of $3.98 billion i.e 72% higher than the revenue in the year-ago period. As a result of the solid topline growth, Micron managed a non-GAAP net income of $0.79 per share swooshing past the analysts’ estimate of $0.70 per share. Another highlight from the earnings call was the $4.81 billion of cash and marketable investments with which the company exited the quarter.

Such huge improvements are a result of Micron's acquisition of Elpida, which it completed last year. The acquisition has enabled Micron to strengthen its position in the DRAM industry, and also brought a lucrative client in the form of Apple, as Elpida used to supply flash memory for the iPhone.

Even though the revenue for the DRAM and NAND markets was slightly down on a sequential basis i.e from the second quarter of 2014 but the scenario in the DRAM and NAND industry is positive, and Micron is slated to benefit from higher pricing and lower cost trends. The company expects DRAM demand to grow at a solid compound annual rate of around 20% to 30% for the next five years. The rapid adoption of mobile DRAM will be the primary driver behind this expected growth.

Apple will drive revenue in Mobile DRAM

The global mobile DRAM market is on track to grow at an annual rate of 10.4% through 2018. Micron's acquisition of Elpida will help it tap this opportunity, as Apple is preparing to launch the next iPhone. According to reports, Apple's A8 will pack a processor and mobile DRAM on a single system-on-a-chip.

Moreover, the mobile DRAM is expected to be manufactured on a 20-nanometer platform, which is exactly what Micron has been working on right now. The chip maker is transitioning from a 25-nanometer process to a 20-nanometer process in mobile DRAM. It is doing this in order to better serve mobile and server customers. Additionally, the shift to a 20-nm process will lead to lower production costs as the die size will shrink, enhancing Micron's margins.

So Apple's next iPhone should prove to be a big catalyst for Micron. According to supply chain estimates, Apple is expected to ship 80 million iPhone 6 units in 2014. As Cupertino ramps up production of the next iPhone, Micron can expect strong orders from its illustrious client. As such, the company seems to be on track to issue a solid outlook for the ongoing quarter and the second half of the year.

NAND is in focus now

Since the acquisition of Elpida in order to substantiate its capacity in the DRAM markets, Micron has renewed its focus in the NAND markets. The advent of smartphones has pumped up the demand for NAND flash memory and Micron is gearing up to leverage this opportunity. Samsung (SSNLF), a leader in this segment has been a hard-charger and focused on rolling out new and valuable products in order to sustain its market share. Recently, Samsung unveiled its new series of Solid State Drives (SSDs) called the SSD 850 Pro, to be used by client based systems. The company has also been experimenting with 3D V-NAND technology that makes use of its proprietary vertical cell structure.

Therefore, it is a clear fact that Micron will have to face stiff competition from a giant like Samsung as it builds its capacity in NAND memory industry. It would be prudent for the company to expand its production of SSDs so as to leverage the economies of scale and make cost-efficient products.

A growth stock

Micron's financials are expected to grow at a terrific pace. In addition, the company's outlook is also strong, which is why it should be able to sustain its solid growth momentum. Analysts agree, as they expect Micron's bottom line to grow at an annual rate of almost 20% for the next five years.

Considering such a solid outlook, the stock is a bargain at just 13 times last year's earnings. In addition, its forward P/E is under 10.

Final words

Though Micron has rallied in the market this year, the company has not yet run out of steam. Trends in the flash memory industry are favourable, while the production ramp of the iPhone 6 will be a big catalyst. These factor could be the growth drivers for Micron in coming quarters as well.

About the author:

Vijay Mehta
A finance executive for over two decades, I am interested in analysing value stocks.

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