Micron’s Earnings Confirm Improving Memory Market Dynamics

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Micron Technology

Quick Take

  • Strong demand and improving ASPs for DRAM and NAND products helped Micron mark a 12% sequential increase in its Q3 2013 revenues, which confirms that the memory market dynamics are improving.
  • The DRAM industry is witnessing a shift in market capacity away from PCs to higher growth segments such as mobile, tablets, servers, automation and networking. Record shipments in its server business and higher DRAM bit shipment in networking accelerated Micron’s growth.
  • With its acquisition of Elpida, Micron is slated to become the second largest DRAM player in terms of market share and manufacturing capacity in the world.
  • With an improving product mix Micron’s DRAM prices will improve in the future.
  • The rising global mobile shipments and increasing demand for SSD’s (more than 60% of Micron’s Trade NAND capacity) are the most important trends driving current demand for NAND Flash products.
  • NAND prices will stabilize as the industry witnesses increasing market consolidation and significant production cuts.

While macro weakness, the demand-supply imbalance and increasing competition put pressure on Micron Technology’s (NASDAQ:MU) top line growth, the declining selling prices combined with the increasing investments in developing new technologies negatively impacted its bottom line in the last few quarters. However, the 12% sequential rise in Micron’s Q3 2013 revenues confirm that the memory market dynamics are improving.

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Strong demand and improving ASPs for DRAM and NAND products helped Micron mark its second consecutive quarter of growth this year. Its restructuring efforts helped enhance its operational efficiency which in turn improved gross margins to 24% in Q3 2013, compared to 18% in the previous quarter. The company returned to profitability with a net income of $43 million in Q3 2012, after incurring losses for several consecutive quarters.

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. We think that Micron is well positioned to leverage future growth potential in the memory market.

See our complete analysis for Micron here

Strong DRAM Demand Driven By Non PC Markets; Higher DRAM ASP

Despite a mere 6% sequential rise in bit sales, Micron’s DRAM revenue grew by 23% q-o-q in Q3 2013, as its DRAM product selling prices improved by 16%. The DRAM industry is witnessing a shift in market capacity away from PCs to higher growth segments such as mobile, tablets, servers, automation and networking. Though PCs account for around 40% of Micron’s DRAM business, the company is focusing on leveraging higher DRAM shipment from alternate markets both via rising volumes as well as increasing content in devices.

At 260 million gigabits, DRAM’s server business saw record shipments in Q3 2013. DRAM bit shipment in networking were up 19% and accounted for 16% of Micron’s DRAM revenue. We believe that improving market dynamics, increasing consolidation in the DRAM market and growing demand from non-PC segments will drive future demand from DRAM products.

With its acquisition of Elpida expected to close in the current quarter, Micron is slated to become the second largest DRAM manufacture after Samsung (SSNLF). The fab assets acquired from Elpida and Rexchip will increase Micron’s trade memory wafer capacity by almost 45% without impacting overall industry supply. [1] Apart from having the second largest DRAM market share and manufacturing capacity in the world, the acquisition will provide Micron with margin leverage as the company will benefit from low-cost scale and an improved operational efficiency.

Micron’s DRAM prices declined by 10% in Q2 2013 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. However, improving market demand combined with more Inotera volume being sold into higher value segments led to a 16% sequential improvement in DRAM ASPs in Q3 2013. DRAM bit costs were 5% lower q-o-q, driven primarily by the higher concentration of lower cost products from Inotera.

With an improving product mix, Micron expects DRAM prices to increase by mid- to high single-digit sequentially in the current quarter, and the DRAM projected bit cost to be flat sequentially.

Mobile Devices & SSDs Are Driving NAND Demand And Stabilizing Prices

Micron’s NAND Flash revenue was 7% higher in Q3 2013 compared to the previous quarter mainly on account of an 8% increase in prices. The rising global mobile shipments and increasing demand for SSD’s are the most important trends driving current demand for NAND Flash products. NAND shipments to the SSD segment represented more than 60% of Micron’s Trade NAND capacity in Q3 2013 and the company expects to see strong demand growth in the subsequent quarters as well. [1]

Rapidly rising smartphone and tablet shipments provide high growth opportunities for NAND products which Micron claims offer better margins. It is in the process of converting a significant majority of its DRAM capacity in Singapore for NAND production.

Micron’s average NAND selling prices in Q2 2013 were flat compared to Q1 2013. While Micron anticipates growing demand for SSDs and mobile devices to help gain momentum in NAND production and demand, it estimates NAND ASPs to decline by mid-single digits in the current quarter. A higher density product mix in NAND will lower both ASPs and cost per gigabyte while increasing volumes. We expect the declining prices to stabilize as the industry witnesses increasing market consolidation and significant production cuts.

We are in the process of updating our price estimate of $8.60 for Micron Technology and have yet to update our model for the recent change in memory product prices.

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Notes:
  1. Micron Technology’s CEO Discusses F3 2013 Results – Earnings Call Transcript, Seeking Alpha, June 19, 2012 [] []