Here’s Why We Believe That Micron Is Worth $25

Micron Technology’s (NASDAQ:MU) stock price has been on a downhill trajectory since the start of 2015, losing almost 30% of its value in the last month alone.  Key factors behind the weak investor sentiment include:  1) weaker-than-expected PC sales; 2) adverse currency headwinds (the company earns a sizable amount of its business overseas, especially Japan); and, 3) Micron’s own admission that its DRAM and NAND output growth will lag the industry growth in calendar year 2015 (as it executes on key milestones in technology deployment and product introductions). While we too have lowered our price estimate for Micron (explained below), our revised price estimate of $25 for the company is still over 30% above the current market price. Despite the short-term weakness, Micron remains a fundamentally strong company, in our view. The company’s growing focus on non-PC DRAM markets and its early entry in the lucrative 3D NAND market offer it strong, long-term growth potential. We will explain these factors in detail below.

Our revised price estimate for Micron – We lowered our price estimate for Micron by 15% after the company reported its Q3 2015 earnings on June 25th. We increased our estimate for the rate of decline in DRAM ASPs, from 10% to 20%, and marginally increased our R&D and capex forecasts for calendar year 2015.

See our complete analysis for Micron here

Micron To Allocate Less Production For PC DRAM; Other Growth Segments To Drive DRAM Growth 

Given the current weakness in the PC market, Micron is allocating less production to PCs and shifting more bit production towards the other relatively stable long-term growth segments. While PCs continue to be an important market for Micron’s DRAM products, we believe the company will benefit from increasing its focus on other high growth segments, including mobile devices, servers and automotive applications.   Over the past two to three years, the company has increased its manufacturing capacity by over 90% (without adding to industry capacity) by acquiring competitors and redefining strategic joint venture partnerships. A large manufacturing base and the capability to shift production easily between end-markets (it takes about 60 days to 90 days to migrate from PC to mobile devices) will serve Micron well in the long-term, in our view.

At present, about 30% of Micron’s DRAM business is focused on PCs, 25% on mobile applications, 20% on servers (enterprise & cloud data center servers), and the remaining 25% on networking, automotive and industrial applications. The company believes that by the end of the year, notwithstanding the decrease in unit sales, there will be a small net growth in bits into the PC segment.

Mobile devices & servers are the fastest growing DRAM segments – The mobile and server segments are the fastest growing in terms of DRAM demand, with annual growth projected in the range of 30% – 50%. ((Micron Technology’s (MU) CEO Mark Durcan on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, January 6, 2015))

In addition to rising mobile shipments, the increasing content in smartphones (both high-end and low-end) will drive up demand for DRAM. At the recently held Morgan Stanley Leveraged Finance Conference, Micron mentioned that in general it expects a 50% plus content growth 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)) Some of the company’s Tier 1 vendors have content at the high-end running in the 2 gigabyte to 3 gigabyte range, and one of Micron’s vendors is looking to double the memory content on the next generation phone. This is true even in the value segments.  A lot of the value phones selling in China or India have more than 1 gigabyte or 2 gigabytes of memory. Micron 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 for the ramp of their next generation phones.

The acquisition of Elpida last year considerably expanded Micron’s footprint in the mobile DRAM market. As already mentioned above, mobile now represents roughly 25% of Micron’s DRAM business. Prior to Elpida’s acquisition, Micron generated less than 10% of its revenue from mobile DRAM.

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 enterprise class  and data center servers. The pure enterprise market is growing at a double-digit rate, while the data center market is growing at 60% – 70% per annum on a per bit basis.

Mircron To Benefit From The Early Transition To 3D NAND; Though Samsung Is Already A Step Ahead, Micron Is Way Ahead Of Other NAND Players

3D NAND is a breakthrough in overcoming the density limit currently facing both planar (2D) NAND and floating gates used in conventional flash memory.  In addition to providing for higher densities, 3D NAND offers speed and endurance improvements. 3D NAND has a more dense chip with twice the write performance and 10 times the reliability of planar NAND. ^[1] 3D NAND cell architecture enables significant performance and cost improvement relative to planar technology.

While the industry continues to consume planer NAND at increasing rates, Micron plans to start volume production of its  high performance 3D NAND later this year. In April 2015, Micron and its joint venture partner Intel (NASDAQ:INTC) announced the availability of their 3D NAND technology. Micron is currently sampling a 32 layer 3D NAND device that it will initially ramp before moving to a second generation of 3D device starting in the back half of 2016.

TrendForce currently projects 3D NAND will account for only 3% of the NAND Flash industry’s overall supply, since the majority of the manufacturers are still in the testing and sample delivery phase. However, it expects the 3D NAND market share to reach 20% by the end of 2015. ^[2] According to IHS research, 3D NAND technology will account for the majority of total flash shipments, equivalent to 65.7% by 2017. ^[3]

Samsung, which accounts for 27.9% of the NAND Flash market, launched its 3D V-NAND storage technology in August 2013 and has already started mass production of the technology.  SanDisk (18.2% market share) and partner Toshiba (21.9% market share) will not have a 3D NAND offering until 2017. SK Hynix (11.4% market share) has yet to reveal a specific 3D roadmap, methodology or timing. While Samsung clearly has the first mover advantage, Micron too can benefit from the early entry in the 3D NAND technology. By the time SanDisk, Toshiba and SK Hynix come up with a 3D NAND offering, both Samsung and Micron will be several generations ahead and will have solved the teething problems of controller design and other architectural issues.

We believe that an early entry in the 3D NAND market can help Micron increase its share vis-à-vis SanDisk, Toshiba and SK Hynix.

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1. Memory wars: RRAM vs. 3D NAND flash, and the winner is ….us, Computer World, August 8, 2013 [↩]
2. Must-know overview of Micron Technology: A DRAMatic growth story, Market Realist, April 24, 2014 [↩]
3. Why Competition in the 3D NAND flash space is heating up, Market Realist, April 28, 2014 [↩]