10/21/2017

Why we like Micron Technology, Inc. (NASDAQ:MU)

We wanted to highlight a report on Micron Technology that we released on 7-7-17 as part of our Quarterly Focus List. While this was a recommendation from July, our current target price as of 10-10-17 is 43.70. This post is a highlight of our Quarterly Focus List and the types of recommendations that come with it.

Micron Technology, Inc. (NASDAQ:MU)

Overview:  Micron provides memory solutions in the form of DRAM, NAND Flash, NOR Flash, and 3D XPoint memory.  Its global brands include Micron, Crucial, Lexar, Elpida, and Ballistix.

DRAM products are high-density, low-cost-per-bit, random access memory devices that provide high-speed data storage and retrieval. NAND Flash products are electrically re-writeable, non-volatile semiconductor memory devices that retain content when power is turned off.  NOR Flash, which are electrically re-writeable, semiconductor memory devices that offer fast read times and are used in automotive, industrial, connected home, and consumer applications. As DRAM is a more expensive chip, it is used in smaller amounts – i.e. 2GB (Gigabyte) in a typical iPhone vs the least expensive iPhone having 32GB (Gigabyte) in NAND Flash memory.

Micron with its joint venture partner, Intel, have invented a new form of memory – 3D Xpoint which provides speeds closer to DRAM but at a cost closer to NAND Flash.  The product will hit the market later half of 2017 and ramp up in 2018.  There is high hopes for the product due to its cost/performance ratio but as it is new and not widely released, it is still too early to tell how financially successful it will be.

Micron manages its business unit in 4 main units – Compute & Networking (43% of Q3 2017 sales ending June 29, 2017) , Mobile (20%) , Embedded (13%), and Storage (24%) .  The company also breaks out its results across its 3 main product lines – DRAM, Non-Volatile Memory (NAND Flash & 3D Xpoint), and Other (NOR Flash).  The DRAM product line is the biggest revenue contributor with 64% of Sales for Q3 ending June 29, 2017, Non-Volatile Memory 31% of Sales and Other contributed 5% of sales.

The company is in very capital intensive business with each fabrication plant costing multi-billion dollar investment.  The company also deals with very complex chips that very few companies makes to scale.  The complexity and capital intensity of the business, has basically created an oligopoly in the DRAM & NAND flash space.  Its competitors in the DRAM space are 2 South Korean firms – Samsung & SK Hynix.  In the NAND space, it is those 2 firms plus Intel and Toshiba/Western Digital.  While there are few competitors, the space is competitive and the product is somewhat commoditized. Companies compete on technology but the main way to improve profitability is to lower production costs.  Samsung is the leader in both technology and manufacturing efficiency with MU behind in both leading to a higher cost basis for MU’s products.  The company’s higher cost structure and older technology made it harder for MU to compete effectively leading to losses in 2016.

Catalyst:  MU’s Goldilocks Moment continues–Higher Demand and Lower Costs The company invested in improving its efficiency by transitioning to 20nm technology in 2016/2017 and will start to ramp up production on DRAM on 1Xnm technology by August 2017.  In December 2016, the company purchased the remaining 67% portion of Inotera that it did not own for US$4.1 Billion in cash. Inotera is a Taiwanese company that supplied DRAM to MU.  The acquisition will provide MU the opportunity to better align its DRAM manufacturing operationally and operate the unit more efficiently while being able to take advantage of higher sales prices. The company’s push for efficiency has decreased cost per Gigabit by 3% from Q1 2017 and 23% from Q2 2016 and management expect the costs to continue declining.

The cost decrease is not only in its DRAM product line – but the company has also improved the cost structure for its NonVolatile memory product line. Cost per Gigabit in NVM has decreased 15% from Q1 2017 and 24% from Q2 2016.  The company has transitioned to 32-layer 3D NAND and will start deployment of 64-layer 3D NAND. The transition to 3D NAND has helped MU lower its cost to stay competitive with Samsung. Industry transition from 2D to 3D NAND has also created a supply shortage as 3D NAND yield rates are still low.  “NAND flash chips are in short supply as NAND flash producers are converting their process from 2D to 3D. The yield rate of 3D NAND flash chips is still low and the newly produced chips are being supplied to Apple and some other companies first.” As the insufficient supply of NAND flash chips continues, its prices will keep increasing unless the demand from computer and smartphone makers decreases.

DRAM has seen a big price increase lately as demand has increased while supplies have remained stable.  In Q3 – the company saw net sales increase by 20% from Q2 2017 and 92% from Q3 2016 – with average selling price increasing by 14% vs Q2 2017 and 37% from Q3 2016, and Gigabits sold increasing 5% from Q2 2017 and 51% from Q3 2016.  As the numbers show, the company has seen its overall sales rise due to combination of increased demand and higher ASPs. “As DRAMs for servers are seeing the demand increase and DRAMs for mobile devices are showing the steady demand, it seems certain that the price of DRAMs will grow in the second quarter.”

MU management believes demand will be sustainable for quite some time as they see number of products and amount of DRAM & NAND installed per product increasing for quite some time. Pricing should also do well as they see no new supply coming in the next quarter. They believe they can achieve at least US$5.7B in sales for Q4 – increase of 77% over Q4 2016.