Micron Technology (NASDAQ:MU) is a manufacturer and marketer of semiconductor devices, primarily dynamic random access memory (DRAM) for PCs and mobile devices, NAND Flash and NOR memory. Having registered a 81% increase in revenues in 2010, the company witnessed a slight decline for 2011, with the DRAM division seeing a 9% y-o-y decline primarily due to overcapacity.
Accounting for 56% of our price estimate and contributing around 39% to total revenues, the DRAM division remains the most significant business for Micron. We expect the revenues from this segment to increase by greater than 50% this year and more than double by the end of our forecast period. Here we list down certain recent trends that support our forecast.
Revival in the Global DRAM Industry
According to research firm IHS iSuppli, the global DRAM market will partially reverse the massive losses incurred in 2011. It predicts the global DRAM revenue to increase to $30.6 billion in 2012, which is close to our estimate of $33.4 billion.  Weak demand last year was one of the primary reasons for the drop in overall revenues, but the major problem was excess capacity in the market that has persisted for quite some time.
Elpida, which has a 17% market share and is one of the major players in DRAM, filed for bankruptcy in February this year.  The exit of Elpida is a welcome change for the existing players, as this will likely shift the market from a state of persistent oversupply to a much needed stability in market dynamics. We estimate the growth to continue till the end of our forecast period.
Micron Announces DDR4 DRAM Module
Earlier last month, Micron announced the development of its first fully functional DDR4 DRAM module. The fast growing notebook and tablet markets could benefit from new opportunities provided by the power savings and performance features of the latest addition to Micron’s portfolio.
The company has begun product sampling and expects to support quick implementation of applications in 2013. The module is co-developed by Nanya and is based on Micron’s 30-nanometer technology, and the company expects to commence volume production by Q4 2012. We think this will be an additional contributing factor to the projected growth in DRAM revenues.
Possible Acquisition of Elpida
Micron is the front-runner in discussions with Elpida for a possible takeover. The $2.5 billion in cash puts the company in a comfortable position to go ahead with the acquisition. Elpida ranked third behind Samsung (SSNLF) and Hynix Semiconductors in terms of DRAM market share, and the acquisition could significantly shoot up Micron’s current 7% market share.
We estimate Micron’s market share to go up to around 18% by the end of our forecast period. However, if the acquisition of Elpida successfully goes through, it would not only lead to a significant rise in Micron’s market share, but also increase its cost competitiveness.
If the market share post the acquisition of Elpida goes up to 20% by the end of our forecast period, there could be an almost 34% upside to our price estimate. You can alter the market share in the graph below to study the impact on Micron’s overall valuation.
We have a price estimate of $7.40 for Micron, a premium of around 20% to the current market price.Notes: