Micron’s Earnings Will Show Continued Growth Momentum

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MU: Micron Technology logo
MU
Micron Technology

Quick Take

  • Macro headwinds, the demand-supply mismatch, growing competition and lower selling prices have impacted Micron’s growth rate in the last few quarters. It saw strong growth in NAND and DRAM products last quarter, and we expect the momentum to continue in Q3 2013 as well. Micron will announce its Q3 2013 earnings on June 19.
  • The rising global mobile shipments is the most important trend driving current demand for memory products – NAND & DRAM. In addition to rising shipments, the growing memory content for such devices will fuel demand for memory products.
  • The acquisition of Elpida and the renewed agreement with Inotera will significantly expand Micron’s manufacturing capacity.
  • Though the additional capacity will be initially used only for DRAM production, the company has the flexibility to support future NAND production with the added capacity.
  • Stabilizing DRAM and NAND selling prices this year will increase Micron’s future profitability.

Micron Technology (NASDAQ:MU), one of the leading manufacturers of memory products (DRAM, NAND & NOR), is set to announce its Q3 2013 earnings on June 19. Macro headwinds, the demand-supply mismatch and increasing competition has put pressure on Micron’s top line growth. Additionally, lower selling prices combined with the increasing investments in developing new technologies has negatively impacted its bottom line in the last few quarters.

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However, owing to strong growth in NAND and DRAM products, Micron saw a 13% q-o-q and a 3% y-o-y increase in its revenues last quarter. The company’s gross margins grew from 12% in Q1 2013 to 18% in Q2 2013, and operating loss declined to $23 million compared to $97 million in the previous quarter. With its inventory declining by more than $350 million y-o-y over the past 12 months, Micron claims that the supply dynamics in the memory market are improving. We believe that Micron will show continued growth momentum in Q3 2013 as well.

Micron remains committed to building a large and diversified memory business. With declining inventory across its product portfolio, rising content growth across devices and an industry shift to higher growth markets – mobile, server, networking enterprise and embedded – we believe the memory market can revive this year onward.

See our complete analysis for Micron here

Mobility Trend To Increase Strength In The Memory Market

The memory market is highly cyclical in nature and is currently seeing excess supply and declining average selling prices (ASP). The increasing number of manufactures in the market combined with slow demand has lowered profitability of memory products. Micron reported growing strength in its DRAM and NAND memory portfolio last quarter. With the ongoing consolidation in the memory market, the company claims that the market dynamics are improving.

The rising global mobile shipments is the most important trend driving current demand for memory products. Smartphone shipments grew by 43% in 2012 ($675 million), accounting for nearly 40% of the mobile phone market. [1] Research firm IDC forecasts mobile phone shipments to climb to 2.2 billion units by 2016, and we estimate smartphones to account for 60% of the shipments. IDC estimates the global tablet market to expand from 117 in 2012 to over 260 million by 2016. [2]

In addition to rising shipments the growing memory content for such devices will fuel demand for NAND and mobile DRAM (mDRAM) products.

The mDRAM density in mobile devices are rising as mobile operating systems, streaming apps and games require more memory to handle sophisticated tasks. As per iSuppli, mobile DRAM density in a smartphone increased to 5.85 gigabits (Gb) in Q2 2012, from 2.28 Gb in Q2 2010. In tablets the mDRAM content grew faster, increasing from 2 Gb to 8.33 Gb during the same period. [3]

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. [4] In addition to smartphones and tablets, the robust demand for SSDs (40% q-o-q increase in sales last quarter) is also driving demand for NAND Flash products.

Micron is expected to close its acquisition of Elpida Memory later this year, which will significantly expand its DRAM manufacturing capacity. Additionally, in January 2013, Micron entered into a new supply agreement with Inotera based on which it agreed to purchase all of Inotera’s DRAM manufacturing output beginning 2013, as opposed to half of Inotera’s output as per the earlier agreement. Though the additional capacity will be initially used only for DRAM production, the company has the flexibility to support future NAND production with the added capacity. (Read: With New Agreement Micron Gains Additional DRAM Capacity From Inotera)

Stabilizing Average Selling Price to Increase Profitability

Both the DRAM and NAND product prices have been declining continuously since 2008. Micron saw a 10% sequential decrease in DRAM prices last quarter due to its higher concentration of sales in the PC market, which have lower per bit selling prices as well as lower per bit costs compared to other DRAM products.

While PCs continue to account for the majority of global DRAM sales, rising contribution of alternate markets including mobile, tablets, servers, automation and networking contribute to higher DRAM shipments both via rising volumes as well as increasing content in these devices. We believe a shift from PCs to alternate growth segments will help drive demand as well as stabilize declining DRAM prices in the future.

Micron’s average NAND selling prices last quarter were flat compared to Q1 2013. For the current quarter, while Micron anticipates growing demand for SSDs and smartphones to help gain momentum in NAND production and demand, it estimates the NAND average selling price to decline by mid single digit.  A shift to high density product mix in both, NAND and embedded solution business segments will lower the selling price and cost per Gb. However, Micron’s CEO expects the rapid decline in NAND prices to ease this year, as the industry witnesses increasing market consolidation and significant production cuts.

We will update our price estimate of $8.61 for Micron Technology after the Q3 2013 earnings release.

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Notes:
  1. Gartner Says Worldwide Mobile Phone Sales Declined 1.7 Percent in 2012, Gartner Newsroom, February 13, 2013 []
  2. IDC Raises Its Worldwide Tablet Forecast on Continued Strong Demand and Forthcoming New Product Launches, IDC Press Release, September 19, 2012 []
  3. Mobile DRAM Market Expands as Usage Increases in Smartphones and Tablets, iSuppli, August 7, 2012 []
  4. NAND Flash Consumption in Tablets to Rise Nearly 400 Percent in 2011, iSuppli Press Release, February 11, 2011 []