Should You Hold On to Micron?

Micron Technology (MU, Financial), one of the leading computing memory players, recently released the results of its third quarter 2018, comprehensively beating analyst-estimates.

Revenue grew 40% year-over-year during the quarter to reach $7.80 billion; analysts were looking for revenue of $7.75 billion.

Earnings per share came in at $3.15, beating the analysts’ consensus by 3 cents. For the fourth quarter of 2018, the memory giant is guiding for mid-point revenue of $8.20 billion, mostly in-line with the Street’s consensus of $8.27 billion. The management expects non-GAAP earnings per share to reach $3.30, slightly behind the analysts’ consensus of $3.36.

The market seems hesitant amid cyclicality fears as the stock is down 5.5% since the earnings release.

What drove revenue?

Revenue growth was supported by the compute business unit (CBU) – that includes memory products sold to computing, networking, graphics and cloud server markets – followed by its mobile business unit, including sales to smartphones and tablet markets. Revenue from CBU increased 67% year-over-year to reach $3.99 billion while the mobile unit contributed $1.75 billion towards the revenue during the quarter, up 55%.

The embedded business unit – that offers products for automotive and IoT – also registered 28% growth.

It is worth mentioning that combined DRAM and NAND memory revenue from data centers grew at an astonishing 87%Â during the third fiscal quarter of 2018. Furthermore, Micron is also witnessing growth on the automotive-side amid adoption of advance driving assistant systems (ADAS) and increased in-vehicle electronic components in the automotives industry.

From a product perspective, DRAM was responsible for most of Micron’s revenue (71% to be exact), up 56%. NAND also witnessed double-digit growth (14%). It should be noted that most of the growth in DRAM and NAND sales came from improving selling prices instead of shipment volumes. Shipments were more or less the same sequentially.

To review, Micron’s super cycle is intact as the company witnessed double-digit growth in almost all of its business units fueled by increased demand from cloud data centers and automotives.

Why isn’t the market rewarding Micron then?

The fear of cyclicality is still there. The fact that Micron reported flat DRAM and NAND shipments aggravate the fear that a downturn in the memory industry is imminent. Influx of supply from Chinese players can adversely affect memory pricing. Moreover, increasing supply from counterparts like Samsung (SSNLF, Financial) can also affect pricing and Micron’s revenue.

Moreover, China’s probe into potential price-fixing against the likes of Micron and Samsung and reports of investment restrictions from the U.S. on Chinese companies might have shadowed Micron’s stellar performance during the third quarter. Although the U.S. government is reportedly taking a flexible view of restrictions on foreign ownership in U.S. technology companies now, initial reports of stringent tariffs on Chinese investments held Micron from breaking out post-earnings.

In short, cyclicality fears alongside trade wars between China and the U.S. might be the reason for the market’s hesitation in bidding Micron up.

Cyclicality overplayed?

The fear of price deterioration is a bit overplayed. First, flat DRAM and NAND shipments from Micron hints toward throttling of supply, which can keep pricing stable going forward; flat shipments don’t necessarily reflect the state of demand in the industry as average selling price of DRAM and NAND increased during the quarter. Average selling prices of DRAM and NAND grew in high single-digits during the third quarter of 2018, according to Micron. In short, throttling of supply is more likely than the notion of deteriorating demand.

The notion of cyclicality – that the memory-demand will fall going forward – is easily rejected based on Micron’s third quarter result. As mentioned above, the memory giant witnessed 87% growth in cloud data centers alongside significant growth on the automotive side.

This means that slowdown in conventional computing memory products can easily be offset by the rising demand for cloud computing and connected devices. “In terms of the industry environment, we expect broader memory fundamentals to remain constructive into next year led by continued demand strength in data center,” said JPMorgan Analyst Harlan Sur in a note to clients last Thursday. Kevin Cassidy of Stifel also shares the opinion of JPMorgan’s analyst; he has an $80 price target for Micron. All in all, cyclicality might not be in the cards for Micron, at least for now.

Valuation update

The third quarter results and fourth quarter guidance from Micron provide more clarity in terms of full-year top-line and bottom-line performance of the company. Earnings are expected to reach $11.7 a share during the full fiscal year of 2018. Based on this figure, valuation update reveals material upside for Micron. Note that previous valuation was based on the non-GAAP earnings per share of $10.98 for the year ended 2018. The estimate is revised upwards in-line with analysts’ consensus.

The valuation sheet reveals a price target of $91, an upside of 65% over today’s market price. Note that the valuation is based on the analysts’ earnings per share consensus of 2018 and lowest analyst earnings per share estimate for 2019 in order to incorporate cyclicality fears.

Takeaways

• Micron’s double-digit growth during the third quarter consolidates the view that the days of cyclicality are long gone. Nonetheless, the company faces risks in the form of China’s push for semiconductor manufacturing and stringent regulation on U.S.-based companies.
• Regulatory scrutiny is very much in the cards amid throttling of supply from Samsung and Micron; flat shipments from Micron during the quarter point towards supply management.
• Nonetheless, Micron is one of the cheaply priced technology stocks as the market is keeping the price in check amid cyclicality fears and potential trade wars between the U.S. and China.

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