Micron’s Earnings Preview: DRAM Recovery & NAND Prices In Focus

Micron Technology (NASDAQ:MU), the only major US memory chip-maker in a market increasingly dominated by Korean manufacturers such as Samsung (NASDAQ:SSNLF) and Toshiba, is set to announce its Q4 2012 earnings on Thursday, September 27.

Despite tough macroeconomic conditions combined with volatility in the memory market, Micron has managed to hold its ground while many manufacturers have had to sell out or shut down operations. The company has acquired stakes in several silicon wafer manufacturers over the years and is currently in discussion to acquire Elpida Memory, a semiconductor DRAM memory manufacturer that declared bankruptcy due to mounting debts from declining prices. With the potential increase in its production capacity, we feel that Micron is in a strong position to leverage future growth in demand for memory products. (Read: Micron Scoops Up Elpida To Bolster DRAM Business)

The memory market is cyclical in nature and is currently witnessing an excess supply situation. However, as the global economy stabilizes and consumer demand picks up, we expect the demand-supply gap to decrease and estimate the industry to transition to a supply-correction phase, 2013 onwards.

Though Micron registered a mere 8% increase in earnings last quarter, the declining inventory levels for all three divisions – NAND, DRAM and NOR – reinforce our belief of the situation improving in the latter part of 2012. Here, we list down certain key factors that we would look out for in the current quarter earnings.

See our complete analysis for Micron here

NAND Flash Memory Selling Price

Micron registered only a slight increase in revenues from the sale of NAND flash products, as the close to 40% increase in NAND sales volume was offset by a decline in average selling price. Micron’s average selling price per NAND Flash Gb of NAND witnessed a drastic decline between 2006 to 2011, from $11.27 in 2006 to $1.21 in 2011.

However, in a recent interview, Micron’s CEO said that he expects the rapid decline in NAND prices to ease down in 2013 as the industry witnesses increasing market consolidation and significant production cuts in the current year. ^[1] With the robust growth rate in mobile devices as well as the strong NAND content growth across all devices, the future prospects of the global NAND flash market looks promising.

We estimate the NAND flash business to contribute close to 26% to Micron’s valuation. We feel that the intense competition in the market will continue to put a downward pressure on price. However, even a slight variation from our price estimate could have a significant impact on Micron’s overall valuation. Thus, to what extent the decline in NAND flash prices offsets the potential increase in sales, is something we will look out for in the current quarter. (Read Related Article: Improvement In NAND Flash Memory Price Can Lift Micron’s Stock)

Recovery In The DRAM Market

Contributing just under 60% to Micron’s stock price, as per our estimate, DRAM is the most valuable division in the company’s portfolio. Stuck in an oversupply glut, the industry has witnessed a continuous decline in DRAM prices over the years. Additionally, a slowdown in the PC growth rate combined with soft macro conditions suppressed demand for DRAM products leading to the current demand-supply gap in the DRAM market.

However, with the hard disk drive shortage behind us, growing ultrabooks sales and the upcoming windows 8 launch, we expect to see potential rise in PC shipments in the second half of the year. An exponential growth in high-end smartphones and strong growth in server shipment, with an improving density per server, can contribute to higher sales of DRAM products.

Micron’s DRAM division registered a 20% sequential increase in revenues, backed by a 12% increase in sales volume and a 7% increase in average selling price in Q3 2012. With the ongoing consolidation in the market, we expect to see further improvement in the same in the current quarter.

Though the DRAM prices have shown signs of strengthening in the recent quarter, we stick to our view of seeing a continuous decline in prices for the rest of our forecast period.

We have a Trefis price estimate of $7.22 for Micron, a premium of over 10% to the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Micron CEO sees higher NAND prices next year, Reuters, August 14, 2012 [↩]