- Core DRAM constitutes 65% of the Trefis price estimate for Micron Technology's stock.
- NAND flash constitutes 32% of the Trefis price estimate for Micron Technology's stock.
WHAT HAS CHANGED?
Full-year 2020 Earnings
Micron Technology reported net sales of $21.4 billion in 2020, down from $23.4 billion in 2019, as the pandemic disrupted manufacturing activities. Further, high raw material prices led to a slump in gross margins, which came in at 30.5% in 2020 vs 45.7% for 2019. Operating expenses also rose marginally, and this has led to net income dropping from $6.3 billion to $2.7 billion, driving EPS down to $2.42 from $5.67.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Micron's value that present opportunities for upside or downside to the current Trefis price estimate for Micron:
- Core DRAM Revenues: The price of DRAM saw a solid increase over the last two years, driven by demand from the cloud, enterprise, mobile, and graphics markets, and stronger sales to higher-value markets. The price increase, coupled with higher bit sales helped Micron boost revenue from $7 billion in FY'16 to about $21 billion in FY'18. However, we expect revenues to decline to about $17.5 billion in FY'19 and $16 billion by FY'20, as the market shifts to a phase of oversupply. We expect revenues to rise to about $28 billion by 2025. Even a slight variation from our estimate can lead to a significant upside/ downside in our price estimate for Micron, as DRAM accounts for about two-thirds of the company's revenue.
If DRAM revenues were to continue to grow steadily through 2025, coming in at about $32 billion, it could increase our price estimate by about 15%. On the other hand, if prices decline by more than expected over FY'19 and FY'20, with revenues recovering to just $22 billion by the end of our review period, it could impact our price estimate by 10%.
Micron Technology, Inc. is a manufacturer and marketer of semiconductor devices, primarily dynamic random access memory (DRAM) for PCs and mobile devices, NAND Flash and NOR Flash memory. In addition, Micron also develops other memory technologies, packaging solutions and semiconductor systems for use in computing, consumer networking and embedded and mobile products.
- DRAM memory is the memory inside a PC/laptop computer. All computing devices require memory for the purpose of execution of programs. Micron has several different technologies of DRAM on the market viz. SDRAM, DDR, DDR2, DDR3 for use in PC market. Mobile DRAM(mDRAM) products are specialty DRAM memory devices designed for applications that demand minimal power consumption such as smartphones, digital cameras, and other handheld electronic devices.
- NAND flash is the memory which is present in a typical USB drive or a mobile flash card. NAND is ideal for mass-storage devices due to its fast erase and write times, high density, and low cost per bit relative to other solid-state memory.
- NOR flash is the memory embedded with the device. The base memory on a mobile phone or a digital camera is typically NOR flash. NOR is ideal for storing program code in wireless and embedded applications. The software/firmware on a mobile phone or digital camera is usually stored on NOR flash memory.
SOURCES OF VALUE
We estimate NAND Flash to account for approximately 39% of Micron's value. NAND Flash is an important source of value for Micron due to the following reasons:
- SSDs are a key growth driver for the NAND industry: Historically they have turned out to be expensive for computing usages due to their high cost per GB of storage. However, in the long term, the mainstream PC SSD will have the most influence on the NAND market. IHS Suppli estimated SSD to reach 190 million units by 2017, which is close to half the size of the HDD market of 397 million. (Link) The Enterprise SSD market was estimated to reach $4 billion in revenues by 2016, nearly six times that of 2011, while unit shipments were expected to increase by ten times during that period, to approximately 4 million units. IT managers have found that they can greatly reduce their IT spend while increasing throughput by replacing enterprise HDDs with SSDs.
- 3D NAND is a fast growing technology:
In March 2015, Micron and its joint-venture partner Intel announced the availability of their 3D NAND technology, a highest density flash technology used in laptops, data centers, tablets, and mobile phones. The company is on track to have more than 75% of our NAND bits on 3D.
While the industry has largely been transitioning from 2D NAND to 3D NAND with the 64-layer technology, Micron intends to introduce its 96-layer NAND into production this calendar year while ramping up production over 2019, in a move that should provide it with significant cost reductions. While rival Samsung has already started mass production of 96 layer 3D NAND, it will crucial for Micron to move down the cost curve at a time of increasing supply, as it would give the company an advantage over other vendors.
Core DRAM currently constitutes two-thirds of Microns' revenue and a similar proportion of its valuation, as per our estimate. We believe that DRAM will continue to be a key source of value for Micron due to the following reasons:
- Highly integrated DRAM manufacturing process: Micron has integrated DRAM manufacturing process and owns the wafer manufacturing facilities which helps it lower its cost base. In addition, it has supply agreements with Inotera which enabled it to increase the production of DRAM products significantly in the past. DRAM supply from Inotera increased significantly in 2011 due to Inotera's transition of its manufacturing from trench DRAM process technology to Micron's stack DRAM technology. Micron recently signed a new agreement with Inotera to purchase 100% of its production, as opposed to 50% as per the initial agreement.
- Consolidating DRAM Market: While the global DRAM market had numerous players a few years back, it is now essentially an oligopoly. Samsung Electronics, SK Hynix and Micron are the top three DRAM players, accounting for more than 90% of the market.
- Improved process technology:
Micron is pushing ahead with its technology transitions to cut costs and improve the performance of its DRAM. The company has been increasing the output of 1x-nm chips, which have process node of between 10- and 19-nm, noting that sales of its 1y – nm chips – which likely pack in more transistors – could commence before the end of calendar 2019.
The DRAM and NAND Flash business is cyclical in nature with each cycle comprising of four phases:
- Increased demand, high profitability:
The market is in undersupply with strong pricing and hence, high profitability. Profits are spent on capacity addition, with increase in supply after a period of 8-12 months.
- Oversupply and losses:
Market is marked by oversupply and falling ASPs. The focus is on driving cost efficiencies.
- Continued oversupply, losses run deeper:
Demand is pushed a little higher due to price elasticity. ASPs continue to fall and approach cash cost levels. Capex is delayed and fabrication units are run at lower capacity.
- Supply correction, return to profitability:
Reduced supply leads to correction and demand sufficiency. ASPs see a correction or possible rebound while costs continue to decline. Capex spending starts again.
As of Q1 CY'2019, both the NAND and DRAM markets were in a phase of oversupply.