Micron: Factors Responsible For A 10% Increase In Our Valuation

Trefis recently increased its price estimate for memory chipmaker Micron Technology (NASDAQ:MU) by over 10%, from $27 to $30. The primary reason for the upgraded valuation is our revised 2014 forecast for Micron’s gross margin.

Revised 2014 Gross Margin Forecast

We initially estimated Micron’s company wide gross margin to increase only marginally (0.5%) in calendar year 2014 (fiscal year ends in August). In our updated model, we expect the company to witness a much higher increase in gross margin (around 5% percentage points) this year. For the first half of calendar year 2014 Micron reported gross margin of 34.3%, while for full year 2013 its gross margin stood at 25.8%. In our model we add back non-cash expenses (such as depreciation and stock-based compensation) to the reported gross profits, which gives us an estimated gross margin of 47.6% and 42.3% for the first half of 2014 and 2013, respectively.

Higher Costs Can Impact Short Term NAND Gross Margin

In its fiscal Q3 2014 (ended May),  Micron’s gross margin was stable compared to Q2 2014. Though DRAM revenue declined marginally sequentially, both average selling prices (ASP) and cost per bit decreased in the low-single-digit range, resulting in relatively stable DRAM margins compared to the last two quarters. On the Trade NAND side too, gross margins were stable in Q1 2015 with generally flat mix adjusted prices and costs. The company reported lower Trade NAND sales volume on account of higher SSD sales, which have a longer back end manufacturing cycle time.

Based on the quarter-to-date ASP trend and projected mix for the quarter (Q4 2014), Micron estimates DRAM gross margins will be flat to up slightly, but Trade NAND gross margins will be down a couple of points. It expects DRAM bit production to be up low single digits, ASPs to be flat and cost per bit to be down low single digits. On the other hand, Trade NAND bit production is expected to be up low to mid-teens, with ASPs  down low to mid single-digits and cost per bit flat compared to Q3.

Key factors affecting Micron’s guidance for lower NAND gross margins in Q4 2014 include an  increasing mix of high-density NAND sales at lower ASPs, continued growth in client SSD volumes with some initially higher costs that impact margins, and the effect of a legacy pricing arrangement with a customer that is trending lower through Q1 2015.

Note: We assume that the gross margin for each product line is the same as the company-wide gross margin. Thus, we assume that the NAND gross margin increases at the same rate as the company gross margin.

Micron believes that the favorable long-term outlook for the memory market will fuel its growth this year and beyond. With a large and diverse memory product portfolio across a number of end-market segments, and the second largest installed manufacturing capacity, it is in a strong position to benefit from the improving industry dynamics.

Our price estimate of $22 for Micron is at a significant 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

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