Continued Stability In Memory Product Prices Can Significantly Increase Micron’s Valuation

MU: Micron Technology logo
Micron Technology

With rapid commoditization of PCs and now smartphones and tablets, the prices of memory chips used in these devices have declined drastically on a cost-per-bit basis in the last few decades. The designs for the most common forms of memory chips are relatively simple and the drive for higher capacity and improved speed is relentless. [1] Though the trend led to rapid innovation, it put a constant downward pressure on prices, even as growing demand required investment in addition manufacturing capacity. Declining prices coupled with intense competition and  periods of excess capacity have driven many players into bankruptcy in the last few years.  Micron Technology (NASDAQ:MU) has increased its manufacturing capacity by over 90% (without adding to industry capacity) through acquisitions and redefining strategic joint venture partnerships in the last two to three years, and is one of the few remaining players in the memory chip market.

The memory business is cyclical in nature where price movements are highly unpredictable. 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 continued to perform strongly in fiscal 2014, reflecting healthy market conditions, which the company believes will remain favorable in 2015 as well.

We expect memory product price (both DRAM and NAND Flash) to continue declining over our review period, albeit at a slower pace compared to the past. The risk that average selling prices (ASPs) of memory products fall relative to the manufacturing costs poses a real concern for the industry, as it will impact margins. To cut  losses manufacturers may decide to keep the supply restricted, which coupled with high demand from non-PC markets can restrict the decline in prices.

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Even a slight deviation from our forecast can have a significant impact on Micron’s valuation.

Our price estimate of $32.23 for Micron is at a 15% premium to the current market price.

See our complete analysis for Micron here

20% Upside If DRAM Prices Remain Stable For The Next 2-3 Years

DRAM (Dynamic Random Access Memory) is the memory commonly used in PCs and servers. There are also specialty DRAM memory devices designed for applications that demand minimal power consumption, such as personal digital assistants (PDAs), smart phones, GPS devices, digital still cameras and other handheld electronic devices.

Micron’s DRAM ASP per gigabit (Gb) has declined from $11 in 2006 to less than $1 at present, and we forecast prices to decline by about 10% every year over our review period. In light of declining PC sales and rising demand for mobile devices, the DRAM industry is witnessing a shift in manufacturing capacity away from PCs to higher growth segments such as mobile handsets, tablets, servers, automation and networking.

With the market shifting from traditional desktops and laptops to mobile devices and embedded computing systems, less fabrication facility capacity will be allocated to commodity DRAM manufacturing. As capacity shifted away from commodity DRAM production, buyers started building up their inventory to avoid any potential supply shortage in the future. In September 2013, a significant fire at SK Hynix’s Chinese fab damaged equipment and left the plant offline. Hynix accounts for 25.7% of the DRAM market and the temporary disruption in its operations led to a shortage in DRAM supply. That’s the reason for a sharp increase in DRAM ASPs in 2013. Prices declined by only 2% in 2014 on account of the short supply-high demand situation.

We believe that the upward trend in DRAM prices might not last in the long run as the underlying cause for the recent upsurge in prices is more due to the strategic move of OEMs and the temporary supply shortage caused by the Hynix fire. Operations have been fully restored at Hynix.  However, if the constrained supply situation persists and DRAM prices remain around the current level for another two to three years (assuming that demand remains high), there will be a more than 20% upside to our current valuation for Micron.

10% Upside If NAND Flash Prices Decline By Only 10% Over Our Review Period

NAND Flash memory is an electronic non-volatile computer storage medium that can be electronically erased and rewritten with new data. Historically, Micron’s ASP per NAND Flash Gb declined drastically between 2006 to 2014, from $12.45 in 2006 to $0.60 in 2014. We expect NAND Flash ASPs to decline at a CAGR of 15% over review period. A shift to a higher density product mix in NAND is expected to lower both ASPs and cost per gigabyte while increasing volumes. NAND Flash vendors are expected to speed up technology migration in order to improve their cost structures and minimize the impact of falling prices.

According to DRAMeXchange, prices for NAND flash parts increased marginally in the second half of 2014 as both Micron and SK Hynix reduced the downstream supply of NAND flash parts from their inventory, despite demand being high. Micron shifted a lot of its NAND production towards its Crucial brand for increased SSD production while Apple secured a sizeable amount of NAND flash production from SanDisk and SK Hynix for the iPhone launch. [2] The easing supply and increasing demand for flash products can stabilize the decline in prices. Rising demand for enterprise class SSD devices and array-based servers can also inflate NAND flash demand and prices.

In its investor meeting in November last year, Intel announced that its 3D NAND solution (in collaboration with Micron) has already reached the prototype stage and the products will be available by mid-2015. The first drives using 3D NAND will likely have capacities in the range of several terabytes and be targeted at enterprise buyers. Though the drives may be very expensive initially, in the long run the technology could drive down prices and make SSDs with one to four terabytes of storage more affordable for consumers.

If the NAND Flash ASPs decline by just 10%, instead of 15% currently factored in our model, the Trefis price estimate will go up by over 10%.

You can study the two scenarios mentioned above here.

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