Strong Market Dynamics Fuel Micron’s Growth In Q2’14

Leading memory products manufacturer Micron Technology (NASDAQ:MU) reported a strong Q2 2014, driven by favorable structural changes in the industry, as well as positive market conditions and solid operational execution. At $4.1 billion Micron’s revenue grew by 1.6% sequentially and 97.6% annually (last year did not include Elpida earnings), and its net income more than doubled sequentially. DRAM revenues were flat sequentially as both sales volumes and average selling prices remained stable. NAND Flash revenue grew by 11% sequentially on account of a 35% increase in sales volume which was partially offset by an 18% decline in average selling price.

In 2012, macro weakness, the demand-supply imbalance, intense competition and declining selling prices lowered Micron’s top line growth and impacted its profitability.  However, increasing consolidation in the industry, rising demand from non-PC markets, and improving memory product prices returned the company to profitability in fiscal 2013. Micron has performed strongly in the first half of fiscal 2014 and is confident of retaining its growth momentum for the rest of the year.

The company maintains a favorable outlook for the memory industry conditions for the rest of the year. With a large and diverse memory product portfolio across a number of end-market segments, and the second largest installed manufacturing capacity, Micron is in a strong position to benefit from the improving industry dynamics.

Our price estimate of $19 for Micron is at a 20% discount to the current market price. We are in the process of updating our valuation for the company.

See our complete analysis for Micron here

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 improving macro environment fueling demand, the market dynamics in the industry are improving.

Normalizing Conditions In The DRAM Market

PCs have traditionally been the major buyers of DRAM, and a slowdown in the PC market has considerably impacted DRAM demand. However, the rising proportion of mDRAM (a low power DRAM product used in mobile applications) sales in total DRAM sales is driving growth in the industry. Additionally, the DRAM market has consolidated considerably in the last two years, with loss-making companies exiting the business, which has removed the excess supply from the market.

The fire at Hynix Wuxi fab last fall resulted in significant reduction in inventory across the DRAM supply chain, in particular for the PC and mobile segments. The declining inventory level across the industry drove DRAM demand and stabilized the declining average selling prices. Prices for DRAM chips made by Micron, Samsung Electronics and SK Hynix have bounced back from a deep memory chip price slump in 2012. ^[1]

Micron claims that the DRAM capacity has normalized as the Hynix’s Wuxi fab is back online. Despite this capacity recovery,   DRAM market conditions remain favorable and inventories in the channel remain relatively below normal levels.

Like other market players, Micron is focusing on leveraging its existing technology road map to deliver more advanced devices to its customers. Capital spending in the DRAM market in the last few years has been more focused on technology migration rather than on building new wafer manufacturing capacity. More advanced tools are swapped into existing production lines to manufacture devices at finer geometries.

For 2014, Micron estimates the DRAM wafer production to decline by mid-single digits and total industry bit supply growth in the low to mid 20% range. Lower supply and customer inventory across channels will lead to an overall stable supply situation in the future, as will the reduction in Micron’s DRAM manufacturing capacity, as it transitions its Singapore fab from DRAM to NAND production,.

NAND Is The Most Rapidly Growing Memory Product

During its analyst day conference last year, Micron declared that NAND products are the most rapidly growing and the most elastic piece of the memory market. The rising global mobile shipments and increasing demand for SSD’s are the most important trends driving current demand for NAND Flash products. According to iSuppli, NAND shipments for tablets are forecast to reach 12.3 billion Gb by 2014. ^[2]

In the NAND space, a significant portion of the capital spending 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. The company now has essentially all of its Singapore operations running in NAND which it believes gives it real benefits in terms of operational efficiency and cost going forward.

Micron projects NAND industry supply growth in the low 40% range for 2014, which includes a 10% growth in industry wafer production and the remaining supply growth coming from technology transitions. It estimates a similar growth range for 2015 but forecasts growth to slow down beyond 2015 as 3D production becomes more predominant and there is a subsequent reduction in wafer output, given the additional back-end capacity required for 3D NAND.

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1. Micron posts second-quarter profit, says outlook favorable, NewsDaily, April 3, 2014 [↩]
2. NAND Flash Consumption in Tablets to Rise Nearly 400 Percent in 2011, iSuppli Press Release, February 11, 2011 [↩]