Hit by excess supply and persistently soft demand in the market, Micron Technology’s (NASDAQ:MU) stock has significantly declined in the last six months. Micron is the only major US memory chip-maker in a market dominated by Asian manufacturers Samsung (NASDAQ:SSNLF) and Toshiba.
Tough macroeconomic conditions and volatility in the memory market have resulted in many manufacturers shutting down operations due to mounting losses. Though Micron has managed to hold its ground so far, we think it will witness negative growth this year as well. 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 onward.
Here we list down certain factors that impact the company’s current valuation.
Slowdown In PC Growth Rate
An unfavorable economic environment and market dynamics favoring mobile devices such as tablets and smartphones are some of the major factors that have moderated the global PC growth rate. Though growth continues to be supported by the potential in emerging markets, research firm Gartner estimates the PC shipments to grow at a moderate 4.4% in 2012. 
Micron sells Dynamic Random Access Memory (DRAM) for use in PCs, notebooks and the server market. We estimate DRAM memory to contribute close to 60% to Micron’s valuation, making it the most valuable division in the company’s portfolio. With the slowdown in PC sales, the company’s DRAM segment has suffered adversely in the last few quarters.
However, with the upcoming Windows 8 launch, the growing popularity of ultra-thin notebooks, strong growth in server shipments and the proliferation of DRAM in mobile devices, we expect to see an improvement in demand 2013 onward. Additionally, Micron’s acquisition of Elpida, which it targets to complete by the first half of 2013, will significantly increase its market share and better equip the company to compete with Samsung (NASDAQ:SSNLF) and Hynix Semiconductors. (Read: Micron Scoops Up Elpida To Bolster DRAM Business)
Declining DRAM & NAND Prices
Like all commodity markets, the competition in NAND as well as DRAM is purely price-based. Demand for both these memory devices is driven by consumer products. The weakening western economies and slowing growth in emerging economies have impacted the consumption of consumer electronic products, leading to lower demand for memory products.
Additionally, the demand-supply mismatch has led to intense competition between existing players, putting a downward pressure on pricing. Though there has been a slowdown in the rate of decline, we believe the highly cyclical nature of the industry does not leave much scope for improvement.
The DRAM memory market has been caught in an oversupply glut, which combined with soft demand has led to a continuous decline in prices over the years. We estimate the DRAM prices to continue declining at an average rate of 25%-30% for the rest of the review period.
Though Micron’s CEO in a recent interview mentioned that he expects the rapid decline in NAND prices to ease in 2013, we think that the intense competition in the market will continue to put downward pressure on NAND Flash prices.
Growth in Mobile Devices To Drive Demand for NAND and Mobile DRAM
With the rapid rise in global shipments for mobile devices, smartphones and tablets will be the key growth drivers in the semiconductor industry. The growing demand for mobile devices will further lead to an increase in flash memory content for such devices, fueling growth in NAND and mobile DRAM sales.
We are witnessing strong NAND content growth across devices, with the average content in USB flash drives expected to grow at almost 50%, close to the historical growth seen in these segments.
According to iSuppli, the tablet consumption of NAND flash is estimated at 2.3 billion gigabytes (Gb) in 2011, an increase of 4 times from 476.8 million Gb in 2010, and NAND shipments for tablets are forecast to reach 12.3 billion Gb by 2014.  We estimate the total NAND flash GB sold worldwide to cross 700 billion by the end of our forecast period.Notes:
- Gartner Says PC Shipments will Grow 4.4% in 2012, Gartner Press Release, March 8, 2012 [↩]
- NAND Flash Consumption in Tablets to Rise Nearly 400 Percent in 2011, iSuppli Press Release, February 11, 2011 [↩]