Micron’s Earnings Preview: Factors That Improve Its Outlook For 2014

Micron Technology (NASDAQ:MU), one of the leading manufacturers of memory products (DRAM, NAND & NOR), will report its Q1 2014 earnings on January 7. Macro weakness, the demand-supply imbalance, intense competition and declining selling prices lowered the company’s top line growth and impacted its profitability in 2012. However, consolidation in the industry, rising demand from non-PC markets, and improving memory product prices returned Micron to profitability (net income $1.2 billion) in fiscal 2013. Excluding the gain realized from Elpida, Micron’s full year operating income improved to $236 million compared to an operating loss of $612 million in fiscal 2012. (Read: Micron Reports A Strong Quarter With Elpida On Board)  Consensus revenue estimate for the fiscal first quarter (fiscal years end with August) is $3.7 billion, roughly twice the prior year level. Of greater interest, however, is the durability of this recovery as we head into 2014.

With the acquisition of mobile DRAM manufacturer Elpida, improving market dynamics, and the upturn in memory product prices, we think that Micron will continue to grow in 2014. With a large and diverse memory product portfolio and the second largest installed manufacturing capacity, Micron is in a strong position to benefit from the improving industry dynamics. ^[1] Nevertheless, the memory product prices are extremely unpredictable and thus we maintain a cautions outlook for Micron.

Our price estimate of $15 for Micron is at a 30% discount to the current market price of $21. We will update our valuation after the Q1 2014 earnings release.

See our complete analysis for Micron here

Improving Memory Market Dynamics

The memory market is highly cyclical in nature. Excess manufacturing capacity, combined with slow demand for PCs,  lowered the profitability of memory products in 2012. However, the industry consolidated in 2013 and 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 present technologies to deliver value-added devices 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.  In addition,the company is investing even more in building greenfield cleanroom floor space and an early pilot line for 3D NAND.

Rising Memory Product 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% in October this year subsequent to the fire at SK Hynix’s factory in China. ^[2]

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.

Acquisition Of Elpida To Double Micron’s DRAM Business

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%. ^[3] Micron is expected to have the second largest installed capacity by the end of this year. ^[1] 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. ^[4] 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.

The inclusion of one month of Elpida’s results accounted for approximately 20% of the total DRAM bit shipments in Q4 2013. ^[5]

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Acquisition Of Elpida Memory Inc. By Micron Technology, Seeking Alpha, April 2, 2013 [↩] [↩]
2. Earnings Preview: Micron Technology, Seeking Alpha, September 24, 2013 [↩]
3. Micron and Elpida Announce Closing of Sponsor Agreement Transactions, Micron Press Release, July 31, 2013 [↩]
4. Micron Seeks Profit Even in Worst of Times With Elpida Deal, Bloomberg, July 31, 2013 [↩]
5. Micron Technology’s CEO Discusses F4Q13 Results – Earnings Call Transcript, Seeking Alpha, October 10, 2013 [↩]