Here’s Why Micron Will Benefit From Higher Mobile Shipments

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Micron Technology

In 2012, macro weakness, the demand-supply imbalance, intense competition and declining selling prices lowered Micron Technology’s (NASDAQ:MU) top line growth and impacted its profitability. However, increasing consolidation in the industry, rising demand from non-PC markets, increasingly diversified end markets, and improving memory product prices, returned the company to profitability in fiscal 2013. For fiscal year 2014 (ended August), Micron reported record revenue of $16.4 billion, record net income of over $3 billion and record free cash flow of $2.6 billion. (Read Our Earnings Article) The company’s stock price has increased from around $6 two years ago to $35 at present.

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, in our view. The company intends to be measured and prudent in its capital spending in the future. Beyond ongoing advanced component and technology development, its main operational focus areas for fiscal 2015 are: technology deployment, optimizing manufacturing capacity and focusing on growing the memory systems and subsystem solutions.

The rapid expansion of smartphones and tablets is one of the primary factor that has fueled growth in the memory market in the last few years. Micron develops different types of DRAM, including mobile DRAM products, that are specialty DRAM memory devices designed for applications demanding minimal power consumption, such as smartphones and tablets. Additionally, the company also manufactures NAND flash products, which with fast read-write times, high density and low cost per bit, are ideal for mass storage devices, such as mobile phones, solid-state drives, tablets, and computers.

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Being one of the biggest players in the DRAM and NAND markets places Micron at a distinct advantage in the mobile segment in the long-run.

Our price estimate of $32.40 for Micron is just slightly below the current market price.

See our complete analysis for Micron here

Rising Mobile & Tablet Shipments

Tablets and smartphones have replaced PCs as the growth engine of the semiconductor industry. Smartphone unit shipments exceeded PC shipments in 2011, and tablet PCs shipments are expected to exceed all other PCs this year. ((Flash Memory Enables Faster Applications and Content Access, Forbes, January 22, 2014))

While global PC shipments declined 9.8% (to 315 million units), smartphone sales grew 38.4% in 2013 (to 1 billion units). [1] [2] Total PC shipments (all form factors) is estimated to decline to approximately 290 million, while total smartphone shipments is expected to increase to 1.7 billion units by 2018, resulting in a CAGR of 11.5%.

According to the research firm Gartner, worldwide sales of tablets to end users reached 195.4 million units in 2013, a 68% increase over 2012, and the number is estimated to increase to 229 million units this year.

Increasing Mobile DRAM Sales & Rising Memory Content In Devices To Benefit Micron

The Smartphone segment is one of the major end-user segments for DRAM products as there is an increasing demand for high memory densities in these devices. DRAM is available as an integrated component for smartphones with content varying between 178MB and 2GB depending on the versions of smartphones. [3] For over three decades PCs have accounted for more than 50% of the DRAM market. However, during Q2 2012, PCs share in global DRAM shipments stood at 49%, the first time since 1980 when it did not consume the majority of DRAM memory products. [4] On the other hand, mobile DRAM’s market share in total DRAM shipments has increased from 7.9% in Q1 2012 to 33% in Q2 2013.

Currently, the use of DRAMs in tablets is not as high as it is in smartphones, but is expected to increase in the future as shipments rise. By 2015, DRAM content in tablets is expected to be similar to that of today’s laptops, reaching 3.7GB. [5]

In its last earnings call, Micron stated that the expanding low to mid range smartphone market is driving additional memory content. The entry-level segment is evolving from phones with virtually no DRAM to new products such as the Android 1, which is 1 GB of low-power DRAM. The company values the low-end smartphone segment (primary devices costing approximately $100) in emerging regions at about 5 billion units.

In addition to increasing mobile device shipments, higher memory content (more DRAM bits being loaded onto the devices) will also contribute to growth in DRAM shipments in the future. The mDRAM density in mobile devices is rising as mobile operating systems, streaming apps and games require more memory to handle sophisticated tasks.

Mobile represents roughly 25% of Micron’s DRAM business. Prior to Elpida’s acquisition, Micron generated less than 10% of its revenue from mobile DRAM. Elpida has a strong presence in mobile DRAM (Apple is one of its customers), and thus the acquisition helped expand Micron’s footprint in mobile DRAM considerably. Micron is focused on its diversified set of mobile customers and continues to balance its PC DRAM and mobile DRAM capacity to optimize for long-term profitability.

Rapid Adoption of eMCPs Is A High-Growth Opportunity

The increasing use of smartphones and tablets is an important factor driving growth of flash memory products.  So too is the increasing dependency on on-line cloud services and applications via these mobile devices for everything from picture and video archiving to games and video streaming,  The overall NAND Flash bit shipments are anticipated to grow about 3.4 times between 2013 and 2016, with growth driven mostly by smartphones and tablets.  ((Flash Memory Enables Faster Applications and Content Access, Forbes, January 22, 2014))

Micron is growing its managed NAND business with increased shipments of eMCPs, which it believes is a high-growth opportunity. eMCPs are essentially low power DRAM packaged with a managed NAND product all behind the controller. The rapid adoption of eMCPs for the low- to mid-end smartphones (the fastest-growing smartphone segment) represents a unique opportunity for Micron. The company estimated that memory combined with the controller will contribute roughly 25% to its overall mobile revenue over the next year.

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Notes:
  1. IDC Expects PC Shipments to Fall by -6% in 2014 and Decline Through 2018, IDC Press Release, March 4, 2014 []
  2. Worldwide Smartphone Shipments Top One Billion Units for The First Time, IDC Press Release, January 27, 2014 []
  3. Increasing Demand for Mobile DRAM Helps Stabilize Vendor Profit Margins, Technavio, May 12, 2014 []
  4. Sign of the Times: PC Share of DRAM Market Dips Below 50 Percent for First Time, iSuppli, September 14, 2012 []
  5. iSuppli: Average DRAM Density In Tablets To Rise By 147% In ’11, Bloomberg []