Micron Technology (NASDAQ:MU), one of the leading manufacturers of memory products (DRAM, NAND & NOR), will announce its Q4 2013 results on October 10. Macro weakness, the demand-supply imbalance, intense competition and declining selling prices lowered the company’s top line growth and impacted its profitability last year. However, the recent consolidation in the industry, rising demand from non-PC markets and improving memory product prices helped Micron report net income of $43 million in Q3 2012, after incurring losses for several consecutive quarters.
- Two Scenarios That Can Change Our Valuation For Micron
- A Look Into Micron’s Poor Operating Performance In Q3’16
- Micron’s Q3’16 Earnings Review: Cost Saving Program & Increased Competitiveness Position To Cut Losses In 2017
- Why Brexit Will Not Have A Significant Impact On The Semiconductor Industry
- Micron’s Q3’16 Earnings Preview: Focus On Investment Priorities Will Pay Off Soon
- Why Micron’s DRAM Business Will Continue To Grow Despite The Declining DRAM Prices
Micron has seen its stock price almost triple in the last ten months. The acquisition of mobile DRAM manufacturer Elpida, improving market dynamics and the upturn in memory product prices led many analysts to upgrade their estimates for Micron, which has added to the positive sentiment around the stock.
We believe that the memory market will revive 2013 onward and expect Micron to benefit from the trend. However, we remain cautious until the company shows a consistent improvement in its performance. We will update our price estimate of $13.47 for Micron after Micron’s fiscal 2013 earning release.
Consolidation In the Industry Has Improved Market Dynamics
The memory market is highly cyclical in nature. The increasing number of manufacturers in the market combined with slow demand lowered the profitability of memory products in 2012. However, with the ongoing consolidation in the memory market, Micron claims to be seeing growing strength in its DRAM and NAND memory portfolio. With manufacturers holding back supply and improving macro environment fueling demand, the market dynamics in the industry are improving.
Micron along with other market players are focusing on leveraging their existing technologies to deliver value-added systems to their customers. Capital spending in the DRAM market in the last few years has been more focused on technology migration rather than on building new capacity. In the NAND space, a significant portion of the capital spend by Micron is being utilized for transitioning the additional fab capacity from DRAM to NAND and a majority of it is being utilized for building greenfield cleanroom floor space and early pilot line for 3D NAND.
Mobility Trend Driving Demand For Memory Products
The ongoing mobility trend is the most important factor driving demand in the memory market. During Q2 2012, the share of PCs in global DRAM shipments declined below 50% for the first time since 1980. On the contrary, mobile DRAM’s market share in total DRAM shipments has been rising. The combined share of mobile handsets and tablets in the DRAM market is estimated to reach about 27% by the end of 2013, almost double from 14% in Q1 2012. 
In addition to the rising global mobile shipments, increasing demand for SSDs is fueling current demand for NAND Flash products, which Micron believes is the most rapidly growing and the most elastic piece of the memory market. 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 in the subsequent quarters as well. 
Acquisition Of Elpida – Higher Installed Capacity & Stronger Presence In Mobile
In July this year Micron closed its acquisition of Elpida, which declared bankruptcy in February 2012 due to mounting debts. In addition to acquiring 100% of Elpida’s equity, Micron also gained control of 24% share of Rexchip Electronics Corp. from Powerchip Technology and some of its affiliates. Together with Rexchip shares acquired from Powerchip, Micron now controls approximately 89% of Rexchip’s outstanding shares and 100% of its product supply.
The fab assets acquired from Elpida and Rexchip will increase Micron’s current manufacturing capacity by approximately 45%.  Micron is expected to have the second largest installed capacity by the end of this year. ((Acquisition Of Elpida Memory Inc. By Micron Technology, Seeking Alpha, April 2, 2013)) A bigger scale will better equip Micron to service large customers.
Samsung and SK Hynix were the top two players in the DRAM market with shares of 37% and 26%, respectively.  However, as per research firm IDC, Micron and Elpida together account for 28% of the market, making Micron the second largest DRAM player behind Samsung.
In addition to becoming the second largest DRAM manufacturer, the acquisition of Elpida will help Micron expand its footprint in the mobile DRAM market, the fastest growing DRAM segment. Though Micron is the leader in enterprise DRAM solutions for networking and servers, it currently generates less than 10% of its revenue from mobile DRAM. Elpida on the other hand has a strong presence in mobile DRAM and targets mobile phones as well as tablets. Sourcing chips for iPhone and iPad for quite some time, Elpida is Apple’s key supplier.
Stabilizing DRAM & NAND Prices
Memory products prices have significantly improved in the last few months as strong demand for DRAM and NAND products coupled with their restricted supply has eased downward pressure on prices. According to Bloomberg, the prices of memory chips have increased 19% this month subsequent to the fire at SK Hynix’s factory in China. 
Since manufacturers are devoting their capacity to produce mobile DRAM products, commodity DRAM products have been in short supply. Thus, buyers are building up their commodity DRAM inventory to avoid any potential supply shortage in the future. Additionally, while the suppliers have not increased their manufacturing capacity, the demand for NAND is increasing due to rising mobile and SSD shipments and higher memory content in these devices.
The trend might not last in the long run as the underlying cause for the price rise is more due to the strategic move of OEMs rather than any fundamental change in market demand for commodity DRAM. Micron stated in its analyst conference that there was some softening in NAND and DRAM prices last quarter due to low volumes on the spot market. However, the company’s exposure to the spot market is is very low and its OEM contract pricing has remained pretty strong and stable.Notes:
- Sign of the Times: PC Share of DRAM Market Dips Below 50 Percent for First Time, iSuppli, September 14, 2012 [↩]
- Micron Technology’s CEO Discusses F3 2013 Results – Earnings Call Transcript, Seeking Alpha, June 19, 2012 [↩]
- Micron and Elpida Announce Closing of Sponsor Agreement Transactions, Micron Press Release, July 31, 2013 [↩]
- Micron Seeks Profit Even in Worst of Times With Elpida Deal, Bloomberg, July 31, 2013 [↩]
- Earnings Preview: Micron Technology, Seeking Alpha, September 24, 2013 [↩]