Micron Technology (MU, Financial) has been a boon for investors in the past year. The stock prices have soared up more than 130% in the last one year and approximately 35% this year outperforming the 5% growth of S&P500. Micron Technology’s ascending earnings surprise in the past and strong fundamentals have helped the memory chipmaker’s performance.
Going Forward
Micron post its acquisition of Elpida has become the fourth-best company if we compare on the basis of sales growth. Elpida has been a major supplier of mobile memory chips for Apple which adds up to Micron’s revenue. Further, Apple’s growth in its desktop, laptop and upcoming iPhone 6 should encourage the demand for Micron’s DRAM.
The company’s innovations in DRAM, NAND and Flash memory along with its customized solution for various mobile and computer companies, which are looking to enhance performance and reduce size, should benefit it in the long run.
Apart from the company’s strength the overall growth in the demand for DRAM and NAND memory chips should also benefit it this year. The company excepts the demand for DRAM and NAND to raise in the mid 20% to 30% and high 30% to low 40% ranges, respectively, over the long term.
Margins should improve
Recently there has been a huge gap in the demand and supply in the DRAM market. Samsung’s manufacturing capacity suffered as it was migrating the production of 20,000 wafer starts for DRAM chips to 25nm process. Further, SK Hynix's production capacity was also affected as its memory chip plant in Wuxi, China was damaged by fire. Both the companies will improve their production capacity eventually, but till then Micron can easily enjoy higher margins by increasing its price.
Another reason to believe that Micron can improve its margins is its last reported 34% gross margin, is still far behind other players of the industry such as Samsung and SanDisk (NASDAQ: SNDK). Though the company generates a gross margin of DRAM in the high 30% range however in NAND it generates margin in high 20% range.
It is noteworthy that SanDisk which only produces NAND products generated a 51% gross margin in its last quarter which means there is lot of scope to increase margins from its NAND products for Micron. Nearly two-fifth of SanDisk’s production is triple-level cell (TLC) NAND which is in as much demand as Micron’s NAND chips and costs 20% less thus boosting SanDisk’s margins. Micron’s top management to has realized the mistake of not focusing on TLC earlier and has taken steps to improve it.
The company is restructuring itself to tackle the concerns in its NAND business, and Durcan believes that the expected improvements should start delivering by next year end. Moreover, Micron’s SSD product launch that is in immense demand over the traditional hard drives should also add to both the top and bottom line for the company.
Conclusion
Micron Technology’s performance has been spectacular so far this year. The company is all set to advantage itself from the overall growth in the memory market. Further the company is well positioned to improve its margins by taking advantage of the demand and supply gap. The addition of clients like Apple post acquisition of Elpida and Intel in its kitty should add stability to its revenue in the long run. At a forward P/E of 10 times Micron is a safe bet with all the future prospects kept in mind.
