Micron Technology (NASDAQ:MU) is a manufacturer and marketer of memory products, primarily dynamic random access memory (DRAM) for PCs and mobile devices, NAND Flash and NOR Flash memory products. In addition, it also develops other memory technologies, packaging solutions and semiconductor systems for use in computing, consumer networking and embedded and mobile products.
The memory market is highly cyclical in nature and is currently seeing excess supply. The slow demand on account of macro headwinds combined with increasing competition in the memory market has further put pressure on both DRAM and NAND memory product prices. The demand-supply mismatch and declining selling prices led to a decline greater than 30% in Micron’s stock price in 2012. However, owing to consolidation in the memory market and stockholder approval for its acquisition of Elpida Memory, Micron’s stock has gained more than 30% since the start of this year.
Here we provide a quick snapshot of the important segments that contribute to Micron’s business and the key trends that could help drive the stock in the future.
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What Are The Important Segments That Contribute To Micron’s Business?
Micron made $8 billion in revenue in 2012 and earned 11% gross margin on the same, which is constant across its business segments. If we add non-cash expenses such as depreciation and stock-based compensation, we get an adjusted gross margin of 37% for 2012. The silicon wafer and other chemicals are Micron’s main raw materials and constitute approximately 30% of the finished product costs. Since we do not anticipate any significant reduction in Micron’s raw material costs in the future, we estimate gross margins to remain around the same level over our review period.
To develop new product and process technologies, support future growth, achieve operating efficiency and maintain product quality, Micron has to invest in manufacturing technologies, facilities and capital equipment. Historically its capital expenditure as a percentage of gross profit (adjusted) has ranged between 20% and 130% and stood at over 50% in 2012. Its R&D and SG&A expenditure as a percentage of gross profit (adjusted) in 2012 was around 30% and 20% respectively.
Micron’s business can be split into the following segments:
1. DRAM: DRAM is a memory product that stores data inside a computer or laptop while the device has power. We can think of DRAM as a short-term memory that computing devices require for executing programs. Micron develops different technologies of DRAM – SDRAM, DDR, DDR2, DDR3- for use in PCs, networking devices, servers, consumer electronics and other communications equipment. It also develops mobile DRAM products that are specialty DRAM memory devices designed for applications that require minimal power consumption such as smartphones, GPS devices, tablets and digital still cameras.
Micron derives approximately 40% of its revenue from DRAM products and it accounts for 15% of the market. Currently, Micron’s average DRAM selling price is $1.07 per Gb, a drastic decline from $5.18 in 2008. However, with stability in demand and improving supply scenario, we expect the decline in prices to stabilize in the future.
The ongoing consolidation in the memory market has taken some excess capacity off the market. Moreover, the shifting industry capacity away from PCs to higher growth segments such as mobile and servers is another favorable trend which would drive future demand for memory products. (Read: Why Growth In Mobile Devices Will Fuel Micron’s DRAM Shipments)
Micron announced its acquisition of Elpida for $2.5 billion in July 2012. Last month, it received antitrust clearance from the Chinese Ministry of Commerce and an approval from the Tokyo district court its reorganization plan for Elpida.
With Elpida’s acquisition, Micron’s market share would almost double and it will overtake Hynix to become the second largest DRAM chips manufacturer behind market leader Samsung (SSNLF). In addition, Micron will have the added advantage of supplying chips to Apple (NASDAQ:AAPL), which could further boost its DRAM market share. In June 2012, Apple placed a new order for DRAM chips with Elpida cutting its reliance on rival Samsung for component supplies. Micron expects the transaction to complete in the first half of 2013.
2. NAND: NAND products are electrically re-writeable, non-volatile semiconductor memory devices that retain content when power is turned off. NAND is ideal for mass-storage devices due to its fast erase and write times, high density, and low cost per bit relative to other solid-state memory. Its most common applications are in removable storage devices such as USB and Flash memory cards and are used with applications such as personal computers, digital still cameras, MP3/4 players and mobile phones.
NAND products account for approximately 44% of Micron’s revenue and the company’s share in the global NAND market stands at 15.5% as of 2012. With the slowdown in growth in the PC market and 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 sales.
According to iSuppli, the tablet consumption of NAND flash is estimated at 2.3 billion gigabytes (Gb) in 2011, an increase of four times from 476.8 million Gb in 2010, and NAND shipments for tablets are forecast to reach 12.3 billion Gb by 2014. 
Micron’s average selling price per NAND Flash Gb of NAND witnessed a drastic decline between 2006 and 2012, from $3.12 in 2008 to $0.83 in 2012. However, Micron’s CEO expects the rapid decline in NAND prices to ease in 2013 as the industry witnesses increasing market consolidation and significant production cuts.
3. NOR Flash: NOR flash is electrically re-writeable, non-volatile semiconductor memory that retains content when power is turned off. NOR is ideal for storing program code in wireless and embedded applications.
Micron earns 11% of its revenue from NOR Flash products and accounts for 25% of the market. We estimate Micron to retain its share in NOR Flash, placing it in a good position to leverage potential growth in the market. According to research firm iSuppli, NOR shipments in the embedded categories, which represents over 80% of overall NOR shipments, are expected to grow to 5.41 billion units by 2015 from an estimated 4.1 billion units in 2012. 
4. Other (Imaging, LED, Microdisplay & Solar): This division contributes only 5% to Micron’s total sales and primarily includes revenues earned from the sale of CMOS image sensors to Aptina under the wafer supply agreement with the company. We anticipate only a marginal increase in revenue from this segment over our review period.
We will update our price estimate of $6.53 for Micron Technology after the Q2 2013 earnings release on March 21, 2013.Notes:
- NAND Flash Consumption in Tablets to Rise Nearly 400 Percent in 2011, iSuppli Press Release, February 11, 2011 [↩]
- Embedded NOR Flash Memory To Expand 8 Percent in 2011, iSuppli, May 27, 2011 [↩]