Why We Increased Our Valuation For Micron By ~60%

We recently updated our valuation for Micron Technology (NYSE:MU) by approximately 60%, and our current price estimate for the company is $24. In the last 6 months, Micron’s stock price has risen by more than 60% mainly driven by a significant improvement in industry dynamics, increasing price stability (especially DRAM), and Micron’s progress on its cost cutting initiative. While the improving demand-supply scenario has driven top line growth, price stability combined with the company’s cost cutting initiative has given a significant boost to Micron’s bottom line. In the first six months of fiscal 2017, Micron’s revenue has increased by 37%, while its net income has risen by a staggering 885%, compared to the same period last year. Micron reported losses for three out of the four quarters in fiscal 2016, and regained profitability in Q1 2017.

Based on recent developments, we have increased our valuation for Micron’s DRAM and NAND businesses by nearly 60%. Major changes that impact our valuation are listed below –

Note – As a % of revenue or gross profit, our forecast for R&D, SG&A, and capital expenditure, as well as our estimates for tax rate, NWC, and NOA has not changed drastically. However, our estimate for R&D, SG&A, and capital expenditure as an absolute value has risen drastically because the revenue and gross profit forecasts have changed significantly.

DRAM And NAND Demand Likely To Outpace The Supply In 2017

Micron expects DRAM supply growth to remain around 15%-20%, as it doesn’t expect suppliers to add significant wafer capacity. Moreover, Micron expects the DRAM demand growth to range between 20% to 25%, outpacing the supply growth. This factor is likely to contribute to further improvements in DRAM ASPs in 2017. We believe that the PC DRAM revenues are likely to remain on an upward trajectory in the near term. This is because the PC market seems to be better-positioned going ahead, due to an improvement in the inventory levels, stronger business demand, and a sequential decline in the prior year comps arising from the expiration last year of the free Windows 10 upgrades.

Micron also expects the NAND demand to outpace the supply growth, and expects the future demand growth to remain in the range of 40%-45%, outpacing the supply growth of 30%-40%. This should translate into higher revenues and profits for Micron.

The situation is in direct contrast to what it was a year ago, when the industry supply outpaced demand, consequently putting downward pressure on prices.

Improvement In Industry Price Dynamics

For most of fiscal 2016, Micron suffered operating losses as the demand for DRAM decreased due to lower PC shipments, while the supply of DRAM increased. However, DRAM prices rebounded towards the end of 2016 because of increasing memory content in mobile devices. Accordingly, major vendors reduced their production mix in favor of mobile DRAM, which led to an under-supply condition in the PC DRAM market. In the last two quarters, Micron has seen a significant increase in DRAM prices, particularly in PC DRAM. Increases over trough pricing for PC DRAM far exceeded other segments (mobile, cloud, and enterprise), which typically react more slowly.

In NAND Flash, while prices continued to decline in the first half of fiscal 2017, it was more on account of higher density product mix. Micron claims to be seeing like-for-like price increases across nearly all segments in NAND and anticipates greater stability in NAND prices going forward.

See our complete analysis for Micron here

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