Micron’s DRAM Business Remains Lucrative: Signs of Stabilizing PC Demand, Focus On New Growth Segments & Capability To Shift Production

At the Citi 2015 Global Technology Conference last week, leading memory products manufacturer Micron Technology (NASDAQ:MU) admitted to seeing signs of stability in the PC market, with reductions in inventory throughout the network and the channel. This could give some breathing room for the company, which has seen a steep decline in its valuation since the start of 2015.  Year to date, Micron’s stock is down more than 50%. Weaker-than-expected PC sales, adverse currency headwinds, and Micron’s guidance that its DRAM and NAND output (or “bit”) growth will lag that of the market in calendar year 2015, are some of the key factors that have contributed to the weak investor sentiment around the company.

PC’s account for almost 30% of Micron’s DRAM business, which in turn accounts for over 60% of the company’s revenue and more than 50% of its valuation.

We believe that Micron’s long-term growth potential remains intact. While the short term variability in the PC market can dampen growth, the fact that the company is focusing on increasing its exposure to other emerging DRAM segments is encouraging. Also, Micron has a large manufacturing base and the capability to shift production easily between end-markets, giving it the ability to conveniently shift its output based on end market demand in a short span of time.

Our price estimate of $24 for Micron is at a significant premium to the current market price.

See our complete analysis for Micron here

PCs Will Remain A Significant Source Of Demand For Micron In The Near Term

In 2000, PCs accounted for almost 70% of the overall DRAM industry bit demand. However, the industry has seen significant diversification of demand in the last few years, and a higher portion of DRAM demand now comes from a variety of applications, including mobile handsets and automotive, industrial, and networking applications. Currently, approximately 30% of industry DRAM demand comes from PCs (client in the accompanying diagram), while mobile devices and servers (enterprise) together account for more than 50% of the demand.

                                                        Source: Micron’s 2015 Summer Analyst Day Presentation

In line with the industry profile, about 30% of Micron’s DRAM business is focused on PC’s, 25% on mobile applications, 20% on servers (enterprise & cloud data center servers), and the remaining on networking, automotive and industrial applications. The proportion of PC DRAM to total DRAM is expected to decline in the future, as the DRAM demand for mobile devices and servers increases. However, Micron believes that for at-least the next three to five years, PCs will be a significant source of demand for its DRAM business. Thus, any adverse development in the PC market will have a direct impact on Micron’s business. The weaker than expected PC demand and the impact it had on DRAM pricing has had an adverse impact on Micron’s earnings over the last two quarters.

Micron claims that it has started seeing signs of stabilization in PC demand and DRAM spot pricing. However, whether or not the worst is behind us is too soon to determine, according to the company. Many industry experts are of the view that PC sales bottomed in Q2 2015. Most believe the launch of Windows 10 in late July and the roll-out of Intel’s Skylake CPU lineup will spur PC demand in the coming months. Additionally, Micron believes that the PC content growth over the course of next two to three years might increase by a mid- to upper single-digit range. ^[1]

Micron’s Shifting Focus on High-Growth Segments To Insulate It Against The Volatile PC Market & Spur Future Growth

Over the last few months, Micron has been allocating less production to PCs and continuing to shift more bit production towards the other faster-growing segments — namely mobile devices and cloud servers.

The mobile device and server segments are the fastest growing in terms of DRAM demand, with annual growth projected in the range of 30% to 50%. In addition to rising mobile shipments, the increasing content in smartphones (both high-end and low-end) will drive up demand for DRAM. Micron expects greater than 50% content growth in mobile devices in the back half of 2015 versus last year. ((Micron’s Management presents at Morgan Stanley Leveraged Finance Conference, Seeking Alpha Transcripts, June 4, 2015)) The company expects to see a fairly good mobile market in terms of the content growth in the back half of the year, as original equipment manufacturers (OEM) make sure they have the supply available to them as they ramp the next generation phones.

Micron claims that its server business also remains a very attractive segment with a demand profile that is less sensitive to price fluctuations in the market. The DRAM server market can be further split into the enterprise and data center sub-markets. The pure enterprise market is growing at a double-digit annual rate, while the data center market is growing at 60% – 70% per annum on a per bit basis.

Apart from mobile devcies and servers, the automotive segment will be another important growth driver for Micron’s DRAM business. Though the automotive segment is a comparatively smaller part of the company’s overall DRAM market, it is growing at a strong pace. Additionally, the segment offer margins above the corporate average and a socket, once secured, can generate demand for up to five to seven years. The overall content growth in the automotive segment is growing by about 10% to 15% in general per year for semiconductors.

Capability To Shift Production Between Different End-Markets

Given Micron’s manufacturing capability, the company has in the past been able to easily shift production between PC DRAM and mobile DRAM. The company claims that it takes about 60 days to 90 days to migrate from PC to mobile. We believe the ease of  shifting production, in case the demand from either of the above mentioned segments becomes unpredictable, places Micron in a strong position to leverage long-term growth in DRAM.

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1. Micron Technology’s Management hosts Citi 2015 Global Technology Conference (Transcript), Seeking Alpha, September 8, 2015 [↩]