Over the last two years, the only company I have found interesting is Micron Technology (MU, Financial). I began following it four or five months ago when I noticed that it was falling. In the past I had noticed that investors such as David Einhorn (Trades, Portfolio) and Seth Klarman (Trades, Portfolio) were investing in it, and both bought it at much higher prices than what it is trading now. Einhorn declared after the stock prices fell that it was still a good investment. I am sure that it is a better buy now than when it was over $30. Indeed, after a long fall and having studied Micron for some months, I decided a few weeks ago that it was too cheap to let it pass and started buying it, fortunately at much lower levels than Einhorn.
I don't like to invest in a stock only because someone I admire owns it. I need to be convinced of it myself and focused on studying it. Fundamentally it looks cheap; what needed to be qualitatively analyzed is if the fundamentals can be sustained. As the conclusion of my investigations, I will discuss here a set of conditions that currently make Micron a unique buying opportunity. I will not focus on numbers such as EPS or fundamental metrics, because I believe that any sophsticated investor can find those out relatively easy. Rather, I will focus on the main factors that make Micron a sustainable long-term investment.
Micron builds highly complicated technological products, dram and flash memory. As they advance, the company needs more knowledge and capital investments in order to execute them. The current cash requirements to make those products' manufacturing plants are now enormous. That is difficult to replicate by other market participants, and it gives them a strong moat. This tends to keep new competitors out and makes the company sustainable in the long term.
Memory is expanding and is projected to expand much more into the future. It is essential for our current electronic civilization. The dram and flash memory market is consolidating; there are fewer players than a few years ago and the buyers are fragmenting, giving memory producers a higher negotiation power than what they traditionally had. New advanced memory solutions such as 3dXpoint, developed jointly with Intel, have a high chance of being successful. That technology will probably find a niche in any storage tier that requires very fast access and has a high chance of being a nice cash generator in the next five years.
The stock looks to be fundamentally cheap and seems to have found a bottom. Its industry is cyclical and after studying it, you will find out that the cycles have become each time smaller and that we are probably near the low point of the current cycle. The interesting difference is that due to industry consolidation, the cycles and the violence of its extremes seems to have been substantially reduced. Industry consolidation is high and deals are being made. There was recent news that Western Digital or Micron may acquire Sandisk (SNDK). Even in what is supposed to be a current cycle bottom, Micron is aggresively spending cash on capital investments.
Probably recognizing its low market valuation, China's Tsinghuas Unigroup offered to buy Micron at a higher price than it trades for now. Even though it will not be bought, it is an indication of a floor on the stock price. Few seem to have noticed that the same company afterward bought a 15% stake in Western Digital (WDC, Financial).
Western Digital is also a competitor of Micron in the storage space. Both produce storage products; the difference is that Micron Technology is oriented in flash storage for fast memory retrieval, while Western Digital uses mechanical hard disk drives for slower memory retrieval. Information is stored in tiered systems depending on how frequently it needs to be accessed. Databases or very frequently accessed information is generally stored on SSD flash disks, such as the ones made by Micron. Other data such as video and photos, which do not need fast retrieval, are stored in traditional hard disk drives such as ones provided by Western Digital. Both types of storage solutions are necessary. Flash disks are more expensive than hard disk drives and it makes no economical sense to use them for infrequently accessed information.
The longer the shares remain low, the better for Micron. Due to capped calls protecting their convertible debt, up until a certain limit, the higher that the stock goes, the more that they will need to pay for their convertible debt. Micron's management is therefore profiting from the current low stock levels to buy back stocks and retiring convertible debt at cheaper prices. Even in this last quarter, a substantial amount of stock was bought back. Capped calls bought to protect the potential dilution brought by their convertible debt limit the amount of dilution that they could eventually have. By reading the latest 10K and 10Q security exchange fillings, it's clear the amount of dilution is relatively small. The low stock prices are convenient since it gives the opportunity to buy back stock and retire convertible debt at cheap levels. At the same time, those actions protect recent buyers since they tend to put a floor on how much lower the stock can go.
Micron Japan, the ex Elpida company, was a dram memory producer bought by Micron Technology in July 2013. It is still under bankruptcy reorganization and Micron has the obligation to pay its debt for the next five or six years. Once that is paid, the amount of cash flow generated will be significantly higher. That does not seem to be taken into consideration in the current valuation and is also a catalyst that could push the stock higher in the future. Micron has been aggressively investing in new technologies, capacity and buying competitors. It profited in the long crash in dram memory to buy companies at cheap levels. By doing that they consolidated their industry, and now there is much less competition than just a few years ago.
The parallels between hard disk drive makers and dram/flash producers are interesting. Both started from a highly fragmented industry which consolidated through the years. In the case of hard disk drive makers, the consolidation has been even higher. In addition to Western Digital, only Toshiba and Seagate (STX) produce hard disk drives. In the case of dram memory, there are only three producers, but the tendency is the same in both industries. They advance towards consolidation and that should bring price stabilization and less cyclicality.
Few investors seem to understand semiconductors, and there seems to be strong negativity on Micron at current levels. The main reason is because dram memory prices are falling. Prices have always fallen, but what matters is making sure costs fall by at least the same amount, in order to keep margins healthy. What counts is how healthy the memory and storage industry is and what its future prospects are. Buying at a period of huge negativity is the perfect scenario. I am leveraging my experience on having studied and invested in companies such as Intel (INTC, Financial), Western Digital and Applied Materials (AMAT, Financial). You can see my current portfolio here. All these companies are on the same ecological system as Micron. All my investments on Intel, Western Digital, Applied Materials and now Micron were done as a consequence of specializing more than anything on that sector.
Micron Technolgy is cheap, has a strong moat and is part of a market that will likely continue to grow aggressively. The possibilities generated by the storage of information will likely make the future storage needs grow even more. Ten years from now, I want to look back while sitting on nice gains and not regret having missed this unique opportunity.
