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 Flash memory. We estimate the company to derive close to 60% of its value from the DRAM business. The DRAM industry has been stuck in an oversupply glut which in turn has led to a decline in prices over the years. The resultant weakness in the memory market combined with macroeconomic headwinds has led to a decline of over 40% in Micron’s stock price since February 2011.
However, with the acquisition of Japan’s Elpida Memory on the cards, the company’s long-term growth prospects look positive. Apart from the direct benefits, we believe that Micron could also gain from the resultant consolidation in the DRAM market. (Read Related Article: Micron Scoops Up Elpida To Bolster DRAM Business) The industry has already started witnessing early signs of declining inventory and strengthening prices, indicating an improved supply-demand scenario.
Consolidation Within The DRAM Industry
DRAM manufacturing is highly capital intensive, and as the technology nodes shrink, the costs of setting up a fabrication unit keeps increasing. The business is such that there is no customer loyalty or brand recognition and hence it is tough for smaller players to survive. In the past, many manufacturers have had to shut down or sell out due to the economic downturn. Over the years, Micron has acquired stakes in several silicon wafer manufacturers which has led to an increase in its production capacity.
However, the recent acquisition of Elpida is perhaps the most significant for the company as it will almost double Micron’s share in the DRAM market, placing it in the second spot behind Samsung (SSNLF). We estimate Micron’s market share in DRAM to reach around 13% by the end of our forecast period. However, the same could almost double post Elpida’s acquisition as Micron’s production capacity is slated to increase to approximately 370,000 wafer starts per month over the long term. 
Falling Inventory & Strengthening DRAM Prices
A recent report by research firm iSuppli indicates that the DRAM inventory index dropped to 11.6 weeks in Q1 2012, marking the second consecutive quarter of improvement since the index hit a high of 12.9 weeks in Q3 2011. The report claims that the drop is primarily on account of the aggressive stockpile burn-off from Elpida. 
The drop down in inventory levels resulted in a marginal increase in the average DRAM prices in Q2 2012, a respite for the industry after a substantial decline in prices during the last three quarters. Though the sell off is likely to be a one time event, the fall in DRAM inventory relative to demand is expected to further strengthen prices in the coming quarters.
We expect the average DRAM selling price per Gb to continue declining for the rest of our review period on account of intense competition in the industry. We believe that Micron’s valuation is most sensitive to fluctuations in the average DRAM prices; and thus, even a slight increase/decrease can significantly impact our price estimate for the company. A 15% increase in our average price estimate by the end of our forecast period, will lead to 10% upside to our valuation for the company.
We have a price estimate of $7.22 for Micron, which is at a premium of around 10% to the current market price.Notes:
- Micron must avoid integration pitfalls now that Elpida deal is done, Solid State Technology, July 25, 2012 [↩]
- DRAM Pricing Strengthens as Inventory Level Falls, iSuppli Press Release, July 17, 2012 [↩]