Micron Technology (MU, Financial) is on a roll of late due to a rise in the prices of NAND and DRAM this year. Most of the manufacturers have decided to decrease the supply, which in turn has helped memory chip makers to deliver positive results after a disappointing period in the last year.
The biggest gainer was Micron Technology as its stock appreciated nearly 123% during this period. Also the company registered a robust earnings report as prices of NAND and DRAM helped the company to recover. Micron’s latest report is indicative of the strength in prices and management’s commentary tells us that the good times are far from over.
This has indeed helped Micron Technologies to post impressive profits. The company registered a profit of $43 million, or earnings of $0.04 per share compared to a loss of $320 million, or loss of $0.32 per share, in the year-ago period. Consequently, this turnaround helped Micron to post impressive revenue of $2.3 billion from $2.2 billion last year. Thus, it’s evident that stronger pricing led to earnings growth and contributed to better margins.
Momentum Set to Continue
However, the good news for the investors is that this trend of strong prices is set to continue and the company is expected to yield better financial and operating results with surging demand for these products in the market. For example, a 16% jump in the average selling prices (ASP) of DRAM along with a 6% jump in volume propelled revenue from the segment 23% higher, while an 8% increase in NAND flash prices led to a 7% jump in revenue from this segment.
Similarly, Micron’s gross margin also increased to 24% in the quarter from 18% in the previous quarter. While the company looks solid with these impressive numbers, there is some concern for the chip maker due to reduced speed in the PC industry that could affect its sales of DRAM chips; therefore memory makers have adjusted their supply according to Average Selling Price (ASP). Throw in the spike in demand for mobile DRAM, and it becomes pretty much clear that the demand is there but in another form.
These factors have helped the company in many ways and further it expects improvement in prices going forward. The company is projecting a mid-to-high single-digits jump in DRAM prices in the ongoing quarter while costs are expected to remain flat. This indicates that further margin improvement is on the way in the fourth quarter, and this should trickle down to the bottom line.
However, the prices for NAND are expected to remain in the mid single-digits in the quarter, but the company has lowered its costs in the previous quarter that should help the company to keep the margin intact. The NAND business is witnessing good demand due to the booming market for solid-state drives (SSD) and mobile. Thus, a slight drop in pricing should be compensated for by higher volumes and lower costs.
Micron is benefiting from the end market as it seems to be finding good traction in mobile. In the DRAM business, shipments to the non-PC business now account for almost half of the total bit shipments. Also, the company is experiencing solid demand for mobile DRAM and NAND on the back of smartphones and tablets.
A Key Acquisition
Also, Micron has acquired bankrupt Japanese memory maker Elpida. As a result, its mobile DRAM segment will see tremendous growth in the coming years. The transaction is expected to be completed in the ongoing quarters. The reason why this is important is because Elpida was one of the suppliers to Apple for the iPhone. Also, the relationship stretches back further, as Apple had ordered Elpida chips a couple of years back as well.
Now, with the acquisition completed, Micron would probably benefit from the upcoming slate of Apple products. The production of the next iPhone is reportedly underway.
While there’s no doubt that buying Elpida, and consequently landing a contract with Apple, will be a huge boost for Micron, a cheaper iPhone would further expand the addressable market for these companies. What’s more, the Elpida acquisition will strengthen Micron’s position in the DRAM industry and give it better pricing power than before as it would be able to command a greater portion of the supply.
Other businesses
Micron is also benefiting from its networking side that has performed significantly well in the last couple of quarters. This segment contributes around 16% of the total revenue but its growth rate is impressive. Networking DRAM bit shipments grew 19% in the previous quarter and given the positive undercurrents in the networking industry, the business should get even better.
In addition, Micron’s strong deployment of faster networks and data centers for the cloud have helped the company to register solid growth rates and the momentum seems to continue in the current year. The company is looking to diversify its customer base by bringing smaller customers on board and this should further contribute to revenue.
In short, everything seems to be going in favor of Micron and solid pricing along with solid demand should help it do even better in the future. But then, some might have doubts whether or not Micron is a good buy at these levels after its solid run up.
Conclusion
Well, I would say that it isn’t too late to buy the stock as the company’s earnings are expected to grow at supersonic rates going forward. The analysts have projected growth of 62% this year and the company looks strong to turn completely profitable next year. What’s more, even the top line is expected to post a decent jump of 18% next year. Also the stock trades at a reasonable forward P/E of 18. I think that the valuation isn’t too stretched yet and the stock has a lot of room to run.
