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Investment Overview for Micron Technology (NYSE:MU)
Below are key drivers of Micron's value that present opportunities for upside or downside to the current Trefis price estimate for Micron:
- Core DRAM ASP: We forecast DRAM ASP for Micron to decline from $0.66 per gigabit in 2015 to $0.24 per gigabit by the end of our forecast period. Even a slight variation from our estimate can lead to a significant upside/ downside in our price estimate for Micron. One of the reasons for the slowdown in decline could be the ongoing consolidation in the industry as well as renewed demand from new technology and consumer devices. On the other hand, a continuous decline in PC shipments and/or higher competition in the DRAM market can accelerate the rate of DRAM price decline. If prices fall to $0.15 over our review period, then there will be an approximate 20% decline in our valuation for Micron.
- Core DRAM Market share: We forecast Micron's market share in core DRAM to increase marginally over our review period. There will be an approximate 10% downside to our price estimate if the market share declines to 23%. On the other hand, there will be a more than 10% upside if Micron's market share reaches 35%. The reasons for a higher market share can be the acquisition of a competitor or the introduction of more cost competitive products. A delay in introducing new technologies by Micron could give its competitors an edge in innovation and pricing, leading to a decline in Micron's market share.
- NAND flash ASP: We forecast Micron's NAND ASP to decline from $0.53 per gigabyte in 2015 to $0.18 per gigabyte by the end of our forecast period. Even a marginal variation from our estimate will lead to a significant upside/ downside in our valuation for Micron.
Increasing consolidation in the memory market and renewed demand from new technology and consumer devices can stabilize the rate of decline in NAND prices. On the other hand, a further decline in PC shipments and/or increase in competition can further put a downward pressure on NAND prices.
- NAND flash market share: We forecast Micron's market share in NAND flash to increase from 12.6% in 2015 to 14.9% by the end of our forecast period. There would be an approximate 15% upside if the market share increases to 20%. On the other hand, if Micron's market share declines to 10% there will be a 20% downside in our price estimate. The reasons for increase in market share can be the acquisition of a competitor or the introduction of more cost competitive products. On the other hand, any delay in introducing new technologies by Micron would give its competitors an edge in innovation and pricing, leading to a possible decline in its market share.
Micron Technology, Inc. is a manufacturer and marketer of semiconductor devices, primarily dynamic random access memory (DRAM) for PCs and mobile devices, NAND Flash and NOR Flash memory. In addition, Micron also develops other memory technologies, packaging solutions and semiconductor systems for use in computing, consumer networking and embedded and mobile products. The firm also manufactures semiconductor components for CMOS image sensors and other semiconductor products. Micron's memory products are offered under the Micron, Lexar, Crucial and SpecTek brand names and private labels. Numonyx products are offered under the Numonyx brand name.
- DRAM memory is the memory inside a PC/laptop computer. All computing devices require memory for the purpose of execution of programs. Micron has several different technologies of DRAM on the market viz. SDRAM, DDR, DDR2, DDR3 for use in PC market. Mobile DRAM(mDRAM) products are specialty DRAM memory devices designed for applications that demand minimal power consumption, such as personal digital assistants (PDAs), smart phones, GPS devices, digital still cameras and other handheld electronic devices.
- NAND flash is the memory which is present in a typical USB drive or a mobile flash card. NAND is ideal for mass-storage devices due to its fast erase and write times, high density, and low cost per bit relative to other solid-state memory.
- NOR flash is the memory embedded with the device. The base memory on a mobile phone or a digital camera is typically NOR flash. NOR is ideal for storing program code in wireless and embedded applications. The software/firmware on a mobile phone or digital camera is usually stored on NOR flash memory.
We estimate NAND Flash to account for approximately 49% of Micron's value. NAND Flash is an important source of value for Micron due to the following reasons:
- SSDs are a key growth driver for the NAND industry: Historically they have turned out to be expensive for computing usages due to their high cost per GB of storage. However, in the long term, the mainstream PC SSD will have the most influence on the NAND market. IHS Suppli estimated SSD to reach 190 million units by 2017, which is close to half the size of the HDD market of 397 million. (Link) The Enterprise SSD market is expected to reach $4 billion in revenues by 2016, nearly six times that of 2011, while unit shipments are expected to increase by ten times during that period, to approximately 4 million units. IT managers have found that they can greatly reduce their IT spend while increasing throughput by replacing enterprise HDDs with SSDs.
- 3D NAND is a fast growing technology:
In March 2015, Micron and its joint-venture partner Intel announced the availability of their 3D NAND technology, the world's highest density flash technology used in laptops, data centers, tablets and mobile phones. Miron started the initial production of Gen 2 3D NAND in Q3’16. Gen 2 3D NAND is double the density of Gen 1 3D NAND, which is going to allow for about an incremental 30% cost reduction. According to IHS research, 3D NAND technology will account for the majority of total flash shipments, equivalent to 65.7% by 2017. (Link) While Samsung clearly has the first mover advantage, Micron too can benefit from the early entry in the 3D NAND technology, as the other players are behinf Samsung and Micron in the production of the 3D NAND technology.
- Micron can out-innovate Korean manufacturers: Micron, in partnership with Intel, had announced a 20nm 128GB capacity NAND flash chip which is double the size of currently manufactured NAND memory chips. Micron started the production of this chip in 2012, ahead of other Korean manufacturers. The move could give it a competitive edge in the market.
Core DRAM currently constitutes more than 60% of Microns' revenue and accounts for approximately 48% of its valuation, as per our estimate. We believe that DRAM will continue to be a key source of value for Micron due to the following reasons:
- Highly integrated DRAM manufacturing process: Micron has integrated DRAM manufacturing process and owns the wafer manufacturing facilities which helps it lower its cost base. In addition, it has supply agreements with Inotera which enabled it to increase the production of DRAM products significantly in the past. DRAM supply from Inotera increased significantly in 2011 due to Inotera's transition of its manufacturing from trench DRAM process technology to Micron's stack DRAM technology. Micron signed a new agreement with Inotera where it will purchase 100% of its production, as opposed to 50% as per the initial agreement.
- Consolidating DRAM Market: While the global DRAM market had numerous players a few years back, it is now essentially an oligopoly. Samsung Electronics, SK Hynix and Micron are the top three DRAM players, accounting for more than 90% of the market.
- Acquisition Of Elpida: Micron closed its acquisition of Elpida Memory, semiconductor DRAM memory manufacturer, in August 2013. In addition to acquiring 100% of Elpida’s equity, Micron also gained control of 24% share of Rexchip Electronics Corp. from Powerchip Technology and some of its affiliates. The fab assets acquired from Elpida and Rexchip will increase Micron’s current manufacturing capacity by approximately 45%. As per research firm IDC, Micron and Elpida together now account for 28% of the market, making Micron the second largest DRAM player behind Samsung(37%)
- Transition to 20 nm: Micron's ongoing transition to the 20 nm technology is expected to lower Micron's DRAM manufacturing cost and improve its chips’ performance. A near majority of Micron’s DRAM bits being shipped at present are 20 nm, which exceeded 25 nm for the first time in Q3’16. The figure is expected to go up to well over 50% by the end of calendar year 2016.
Declining prices and oversupply
The DRAM and NAND Flash business is cyclical in nature with each cycle comprising of four phases:
- Increased demand, high profitability:
Market is in undersupply with strong pricing and hence, high profitability. Profits are spent on capacity addition, with increase in supply after a period of 8-12 months.
- Oversupply and losses:
Market is marked by oversupply and falling ASPs. Focus is on driving cost efficiencies.
- Continued oversupply, losses run deeper:
Demand is pushed a little higher due to price elasticity. ASPs continue to fall and approach cash cost levels. Capex is delayed and fabrication units are run at lower capacity.
- Supply correction, return to profitability:
Reduced supply leads to correction and demand sufficiency. ASPs see correction or possible rebound while costs continue to decline. Capex spending starts again.
The market was in the continued oversupply and losses phase till 2012, but entered the correction and profitability phase in 2013. The market is somewhere between Phase 3 and Phase 4 at present.
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How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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