With a 20% sequential increase in its DRAM revenue, Micron Technology (NASDAQ:MU) shows early signs of recovery in the memory market. Though, much of the increase in sales volume of NAND was offset by a decrease in its average selling price, we believe that a broad product portfolio, improving cost competitiveness and capital efficiency will lead to an improvement in market conditions in the second half of the year.
Micron registered a meager 8% increase in earnings this quarter. However, with declining inventory levels for all three divisions – NAND, DRAM and NOR, indicative of an improving supply situation and a growing demand in the economy, we believe that the company could witness significant growth in the second half of the year. Here, we discuss some key aspects of this quarter as well certain events that would impact the company’s performance going forward.
Signs of A Recovery In The DRAM Market
Backed by a 12% increase in sales volume and a 7% increase in average selling price, the DRAM division registered a 20% sequential increase in revenues. While the improved availability of hard drives led to an increase in PC demand after almost two quarters of stagnant growth, lower supply growth and recovery in demand led to an improvement in PC pricing. With an improving density per server, the company witnessed an increase in orders continuing the strong growth in server shipment for the third consecutive quarter.
Seasonal recovery, growing ultrabooks sales and the upcoming windows 8 launch; all point towards a potential rise in PC shipments in the second half of the year, contributing to the growing sales of DRAM products.
Additionally, an exponential growth in high-end smartphones and Intel as well as ARM architecture based tablets; segments that require a large density of mobile DRAM, will drive sales for Micron’s mobile DRAM in future.
Acquisition Of Elpida Will Expand Micron’s Market Share In DRAM
Micron’s acquisition of Texas Instruments (NYSE:TXN) DRAM business in 1999 and Toshiba’s DRAM business in 2001, alleviated the oversupply condition in the industry and helped Micron sustain its core technological competencies. The proposed acquisition of Elpida, which constitutes around 15-20% of the DRAM industry capacity will help Micron further expand its scale and enhance operating efficiency.
The company feels that it is in a unique strategic and financial position to go ahead with the acquisition. We believe, that a further consolidation in the DRAM market could help improve the persistent oversupply situation, in turn bringing about stability in market prices. (Read Our Article: Micron’s Elpida Acquisition Could Help Consolidate The DRAM Market)
Currently, we estimate Micron’s share in the DRAM market to reach around 13% by the end of our forecast period. However, if the acquisition is successful, the market share could almost double by the end of the period, leading to a significant upside to our price estimate.
Structural Improvements in NAND Inventory
Registering only a marginal increase in revenues, the NAND market softened this quarter on account of declining prices. Due to a shift in product mix that led to significant decline in per bit cost and selling prices, NAND market prices declined across the board in Q3 2012.
However, the company witnessed improved stability during the end of the quarter; and we believe that favorable market conditions will see the situation improving further in the next quarter. Growth in demand for smartphones, tablets and SSDs as well as increase in the average density for SSD units will continue to drive demand for NAND products.
This quarter, Micron announced the restructuring of its partnership with Intel, where it will buy-out Intel’s 18% interest in the IM Flash operation in Singapore and purchase from the IM flash entity its production assets in the micron fab in Virginia. As per the agreement, Micron will sell a portion of the total capacity of 30,000 wafers per month back to Intel under a for-profit take-or-pay supply agreement. We expect the additional profit capacity to have a positive impact on margins in the coming quarters.
We are updating our model for Q3 2012 earnings and will upload the same soon.