Why Is Micron’s Stock Up More Than 30% This Year, Despite Falling NAND And DRAM Prices?

Micron Technology (NASDAQ: MU) 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. 2019 has been a great year so far for Micron, with its stock gaining more than 30% from the beginning of the year even with declining DRAM and NAND memory prices. This is largely due to the above factors already being priced in, and market expectations toward a steady growth in DRAM and NAND prices from Q1 2020.

In this dashboard, What’s Driving The Rally In Micron’s Stock?, Trefis analyzes why Micron’s stock has outperformed the market and what to expect in the near future.

How has Micron’s stock performed with respect to the market?

• Micron’s stock price has increased from $32.80 at the beginning of the year to around $44 now.
• This translates to a growth of roughly 33%.
• This is significant, given the fact that the S&P 500 index has risen around 16% over this period.
  

A look at the trend in NAND and DRAM selling prices

• NAND selling prices have seen a consistent decline, dropping at least 9% per year over the last 4 years.
• Prices dropped 11% in 2018 and are expected to drop around 14% in 2019, amidst a supply glut.
• However, when Micron announced Q3 ’19 results, they claimed signs of NAND demand improvement, and announced plans to reduce their CapEx in 2020 to help balance industry supply-demand. This was taken as a major positive across the memory segment and things are expected to get better hereon.
• DRAM prices too are expected to take a 40% hit this year, but that would just negate the 37% rise in prices over 2018.

A] A look at Micron’s revenue trend over recent quarters

• Micron’s revenue comes mostly from Core DRAM and NAND flash memory, with NOR and 3d XPoint products making up a small portion.
• Revenue was more or less consistent through Q1 ’19, despite a steady drop in NAND flash prices over the years, due to increasing sales volumes, driven by high-value SSD and 3D NAND.
• Of late, a supply glut in the DRAM and NAND markets has been weighing down revenue, but it wasn’t entirely unexpected, as the memory business is extremely cyclical in nature, with demand and supply extremes seen every few years.

B] Micron has beaten EPS estimates throughout 2019

• Micron has managed to consistently beat earnings estimates this year.
• This comes as a positive even amidst a gradual drop in earnings, as the company has taken measures to cut operating costs to go with the drop in revenue, while also not compromising research initiatives into better, more efficient memory technology.
• This way Micron has been able to weather the storm, and also make sure that revenue growth gets back on track once the supply glut has passed.

C] DRAM market share has consolidated significantly since 2011

• The DRAM market has consolidated significantly to only 3 major players, from around 7-8 players back in 2011.
• This consolidation can help avoid any drastic and prolonged fall in DRAM prices.
• Even then, amidst the current supply glut we expect DRAM prices for 2019 to drop temporarily, by about 40% from 2018 levels.
• But we do not see this as a prolonged drop, and expect prices to get back up going into 2020.

D] Micron’s $10 billion Share Repurchase Program

• In May 2018, Micron Technology announced that its Board of Directors has authorized the repurchase of up to $10 billion of its outstanding common stock, in a bid to return at least 50% of free cash flow to stockholders beginning in fiscal 2019.
• Micron’s share count has since dropped gradually and this has been another positive for its share price.

E] Analyzing Micron’s P/E multiple and what it means for the company

• Micron’s P/E multiple has dropped significantly since 2016, from 22.45x to 4.56x in 2018.
• The average PE multiple of the semiconductor industry is around 18-20x, and Micron’s PE multiple is significantly lower.
• With expectations of the supply glut clearing out by 2020, and further research into memory technology, Micron’s PE has risen to 7.85x in 2019.

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