Micron To Benefit From Improving Memory Market Dynamics

Leading memory products manufacturer Micron Technology (NASDAQ:MU) will announce its Q2 2014 results on April 3. Backed by improving memory market conditions, stable prices and the first full quarter of Elpida financials, Micron witnessed a 120% year-over-year growth in its Q1 2014 earnings. Macro weakness, the demand-supply imbalance, intense competition and declining selling prices lowered Micron’s top line growth and impacted its profitability in 2012. However, increasing consolidation in the industry, rising demand from non-PC markets, and improving memory product prices returned Micron to profitability in fiscal 2013. The company started fiscal 2014 on a strong note and expects the positive growth momentum to continue for the rest of the year.

Micron claims that the industry fundamentals for both DRAM & NAND products remain solid, and it is getting strong demand signals from a majority of its customers. A large and diverse memory product portfolio across a number of end-market segments, and the second largest installed manufacturing capacity, place Micron in a strong position to benefit from the improving industry dynamics.

Our price estimate of $19 for Micron is at a 17% discount to the current market price. We will update our valuation after the Q2 2014 earnings release.

See our complete analysis for Micron here

Improving Memory Market Dynamics To Drive Growth

Excess manufacturing capacity, combined with soft market demand, lowered the profitability of memory products in 2012. However, the industry consolidation in 2013 improved the demand-supply balance considerably. With manufacturers holding back supply, and a better macro environment fueling demand,  market dynamics in the industry are improving.

The fire at Hynix’ Wuxi fab last fall resulted in a significant reduction in inventory across the DRAM supply chain, in particular for the PC and mobile segments. Micron believes that the inventory situation will decline further in subsequent quarters, which combined with balanced long-term production and demand, will drive growth in the DRAM market.

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 process technology migration, rather than on building new capacity. Micron estimates the DRAM industry wafer production will be down by 5% in 2014, with total DRAM industry bit supply up in the mid-20% range.

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. Micron projects NAND industry supply growth in the low 40% range for 2014 (calender year), which includes a 10% growth in industry wafer production and the remaining supply growth coming from process technology transitions.

With both the DRAM and NAND businesses, the company anticipates greater stability, a sharp contrast to the dramatic cyclicality that  affects both from time to time.

Acquisition of Elpida Increases Micron’s Market Share

Over the last 18 months, Micron has increased its manufacturing capacity by over 90% (without adding to industry capacity) through acquisitions and redefining strategic joint venture partnerships. With the acquisition of Elpida, Micron has the second largest installed capacity, which better equips the company to service large customers. ^[1]

Micron closed its acquisition of Elpida in July 2013. 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.

Samsung and SK Hynix were the top two players in the DRAM market with shares of 37% and 26%, respectively. ^[2] 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 expands Micron’s 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 historically generated less than 10% of its revenue from mobile DRAM. The addition of Micron’s legacy mobile business with Elpida’s mobile business comprised roughly 30% of Micron’s DRAM revenue in Q1 2014.

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1. Acquisition Of Elpida Memory Inc. By Micron Technology, Seeking Alpha, April 2, 2013 [↩]
2. Micron Seeks Profit Even in Worst of Times With Elpida Deal, Bloomberg, July 31, 2013 [↩]