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Soid Ahmad
Soid Ahmad
Articles (82)  | Author's Website |

Micron Maintains the Super Cycle

Stable demand and supply discipline to follow in fiscal 2018

September 08, 2017 | About:

Micron Technology (NASDAQ:MU) recently presented at the Citi 2017 Global Technology Conference, debunking the ideas and arguments of a slump or a downward cycle in the business.

Ernie Maddock, senior vice president and chief financial officer (CFO), believes the demand for both DRAM and NAND will stay strong during fiscal 2018. He cited the need for data storage and data processing as the key drivers of growth.

The management expects the DRAM and NAND bit growth to be around 20% and 40% for fiscal 2018; demand growth will be in line with the bit growth, according to Maddock.

This eradicates fears relating to worsening demand and increasing supply in the industry. Micron is set to grow in the year ahead amid decent demand growth along with stable supply growth. Highlights from Micron’s presentation follow below:

Is demand under pressure?

The short answer is no. Collection and use of data, its rate of expansion, along with applications in the automotive industry are driving the demand for DRAM and NAND, Maddock said. He explained that collecting data requires processing while saving data requires memory, which speaks heavily to the demand side of DRAM and NAND.

What’s driving the demand?

Talking about the drivers of demand, he singled out server and mobile as the primary drivers of growth. M2M and autonomous vehicles are also expected to fuel the demand side. Demand from servers remained strong during fiscal year 2017; it was toward the higher end of the company’s guidance for 2017.

According to Maddock, the big driver for server demand was the massive amount of data that is being used to form business intelligence. This is, in fact, driving hyperscale growth.

When asked about AI, he noted that AI is an important trend, but it’s significant from a long-term perspective. It will sustain demand going forward. In the short term, though, the use of data for business intelligence is driving the demand growth.

To review, demand isn’t under pressure, and the industry’s super cycle is intact. The management’s commentary on demand portrays a rosy picture for Micron.

What about supply?

The investor community is concerned about excess supply in the industry going forward. China is the most cited reason for the expected future bit growth. Further, supply growth of ~40% in NAND also adds to oversupply concerns.

According to Micron’s management, supply is expected to remain in line with the demand; it won’t surpass demand.

Maddock pointed out in the conference that China is ambitious, and it is building Fabs. But at the end of the day effective production of DRAM and NAND is a combination of know-how, IP and experience. He also pointed out that Micron along with other players had problems in technology, which they overcame. He further noted that progress has been slower on the China front, which conforms to management’s opinion that innovation can’t be easily replicated.

In simple words, complex design and learning curve are the biggest barriers to entry. These challenges are formidable, as Micron’s management puts it.

Regarding the prospective NAND growth, it’s well matched to the demand growth of 45% to 50% for fiscal year 2018. Moreover, industry consolidation had been instrumental in promoting the supply growth discipline.

It seems like demand-supply dynamics will remain stable going into 2018. NAND bit growth will be supported by similar demand. China can surely add to the capacity, but quality will be an issue. This somewhat shields Micron from the supply buildup threat from China.

All in all, demand and supply will remain balanced. This also means that pricing will continue to remain stable going forward. The pricing environment continues to be good, Maddock said. He said price has been on an upward progression while being responsive to the subject of price softening.

How’s CAPEX looking?

Investments are mainly focused on technology transitions. The management made it clear that closing the technology gap is at the forefront of its objectives while staying FCF neutral or positive. Micron didn’t provide any color on the fiscal 2018 CAPEX during the technology conference. But the company expects the industry CAPEX to increase during the next year.

What else?

Answering a question regarding inventory buildup he mentioned that there isn’t a quantity buildup of inventory. The buildup relates to dollar adjustments.

The management also pointed out that high-bandwidth memory for GPUs is a fast-growing business. It’s growing relatively faster than the overall business, and it’s a high value business. But it’s nowhere near even one-quarter of the company’s total business, not even in the next three years.

Speaking of technology, management indicated its plan to transition to 1Y by the end of 2018. The company is still behind Samsung Electronics (SSNLF) in terms of technology progress but is catching up.

Further, Micron believes both DRAM and NAND are going to be in demand going forward. It’s hard to know which will be predominant. There is no long-term approach to become a NAND-only business, but NAND is growing quickly relative to DRAM. Nonetheless, the company isn’t looking to be a pure NAND play going forward.

Final thoughts

As discussed in my previous piece, cyclical downturn fears are overplayed. The memory industry is changing as cycles disappear amid the need to process and store data. Applications like automotives and M2M are also driving the growth. Memory isn’t a PC-only business now. Data centers and servers space will continue to fuel the demand for memory.

This conference cleared the air around demand concerns. Regarding supply, although Micron touted technical know-how to be the barrier for China’s growth, the threat is still there. It’s not like China will overtake the market.

Moreover, Micron’s dedication to technology advancement bodes well for the company. Overall, Micron remains a buy amid growing DRAM and NAND demand matched by stable supply and resulting price and low valuation.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.

About the author:

Soid Ahmad
Soid Ahmad is affiliated with the Association of Chartered Certified Accountants. He graduated from Oxford Brookes University. He also holds a Masters degree in Economics and Finance from HSRW Germany. He has been working as a technology analyst for several years and has an eye for mispriced technology stocks. He is also affiliated with Focus Equity, an independent equity research firm.

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