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Riddhi Kharkia
Riddhi Kharkia
Articles (151) 

Strong Results and Optimistic Outlook Make Micron A Convincing Buy

September 26, 2014 | About:

In my previous articles on Micron (NASDAQ:MU), I have repeatedly stressed on the burgeoning demand in the DRAM and NAND markets especially because of the advent of smart devices, which has spurred the demand for mobile DRAM. In fact, this article points out that Apple’s (NASDAQ:AAPL) standalone consumption of mobile DRAM will grow from 16.5% of the industry’s total production volume today to 25% in 2015 as the company outfits more smartphones, tablets as well as laptops, with DRAM chips. Similar is the case with NAND flash wherein Apple has been one of the largest consumers because of its iPods and iPhones. Now, a good number of investors were skeptical of major players in DRAM causing an imbalance by increasing supply. However, the earnings beat delivered by Micron in the most recent quarter will certainly alleviate some of these fears.

Solid quarterly results

In the fourth quarter of fiscal 2014, Micron delivered revenues of $4.23 billion, 6 percent higher compared to the third quarter and 49 percent higher compared to the prior year period. Micron comfortably beat the Street estimate of $4.15 million on the topline. Also, Micron beat the consensus EPS estimate by $0.01 as it delivered an earnings of $0.82 per share. An up-front charge recorded in the fourth quarter of fiscal 2014 associated with the company's recently executed patent license agreement with Tessera Technologies (TSRA) led to a small decline in consolidated gross margin as compared to the third quarter of fiscal 2014. However, cash flows from operations were $1.35 billion for the fourth quarter of fiscal 2014 while investments in capital expenditures were $1.33 billion. The company ended the fourth quarter of fiscal 2014 with impressive cash and marketable investments to the tune of $5.35 billion.

This is what CEO Mark Durcan remarked after the results, “We are pleased with the company's performance that resulted in record revenue and earnings for the year. Continued favourable market conditions and steady execution led to increases in sales volumes and another quarter of strong operating margins and earnings per share.” This statement clearly implies that, in spite of the fears that Samsung is going to increase its production capacity, the demand and price scenario was not affected and has continued to give leverage to the industry.

Apple: A coveted customer

In the above paragraphs, I mentioned how Apple was looking at putting mobile DRAM into its laptops, which has led to shifting of PC DRAM manufacturers to mobile DRAM. Now, Micron’s continued 25-nanometer DRAM conversion and rampup of 20-nanometer DRAM will place it in a good position to meet Apple’s increased demands in fiscal 2015. Additionally, the acquisition of Japanese chipmaker Elpida has led to consolidation in DRAM supply and catapulted Micron to being the third biggest supplier of DRAM. In fact, this acquisition has been compared with Google’s acquisition of Youtube in terms of synergies and benefits that will be achieved.

Now, analysts have been worried that Samsung’s (SSNLF) decision to pump up its DRAM production capacity will negatively affect the prospects of other big players like Micron and SK Hynix. This is because an increase in supply, without a corresponding increase in the demand, will impact selling prices. One of the reasons behind Micron’s phenomenal earnings beat has been a surge in chip prices, and investors fear that a negative impact on selling prices will not be good for Micron in the long run. However, the fear should subside because Micron itself has exhibited high confidence in a balanced demand-supply growth as evidenced by its guidance.

Micron has guided for FQ1 revenue of $4.45B-$4.7B, which is higher than the $4.36B consensus. Also, the company believes that mid-to-high single digit bit growth will persist in the DRAM market along with a low-single digit ASP (Average Selling Price) increase. Therefore, it can be assumed that the DRAM market will not see a supply burst in near to mid-term plus the increase in smartphone shipments will have a favourable impact on demand. Since DRAM contributes around 70% of Micron’s total revenue and the ongoing consolidation on the supply side has definitely reduced the extreme price fluctuations that persisted in the past.

Exploring the scenario in NAND

Shifting my focus to NAND market, let me point out at the very onset that Micron has a limited exposure in this segment and is still working on building a robust presence in this area. For the upcoming quarters, Micron has plans to complete the 16-nanometer planar NAND conversion and execute the introduction of 3D NAND. Also, it estimates that NAND will represent about 20% of its CapEx in fiscal 2015. Well, this is Micron's side of the story with respect to NAND and hence, let us take a few moments to analyse NAND market situation going ahead.

A strong growth in client and enterprise SSD markets coupled with the increase in production of smartphones and tablets, will spur the demand for NAND memory. It is expected that the NAND supply growth will be in the high 30% to low 40% range for 2014. However, the declining ASP does pose a challenge for the industry, and this can be stabilized by ensuring a healthy balance between demand-supply and effective cost-cutting initiatives. For example, the 16-nm NAND chips will cost lower than the 20-nm version and hence, Micron is working on the same. One of the drivers that would help Micron in boosting its NAND business is process innovation and the company is investing credible efforts in just doing that. Besides launching the 16-nm planar product, Micron is also planning to extend its leadership by promoting the 3D NAND device, which will supposedly have the highest density per square inch of silicon in the industry.

Takeaway

Even though there are reasonable concerns surrounding the DRAM and NAND markets, Micron has been able to deliver solid results and its guidance surely reflects a strong outlook. Being one of the three leading players in the industry, Micron is the ideal investment choice in this segment for its product focus and justified valuation (Check here).

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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