VALUATION HIGHLIGHTS

1. Core DRAM constitutes 73% of the Trefis price estimate for Micron Technology's stock.
2. NAND flash constitutes 27% of the Trefis price estimate for Micron Technology's stock.

WHAT HAS CHANGED?

Latest Earnings: Q3 FY'2024

Micron posted a better-than-expected set of Q3 FY'24 results driven by a rebound in pricing for memory chips and surging uptake for high-bandwidth memory used in AI applications. While revenue came in at $6.81 billion, up from $3.75 billion for the same period last year, adjusted earnings stood at $0.62 per diluted share.

Note: Micron's Q3 FY'24 ended on May 30, 2024

Artificial intelligence-related demand growth

Generative AI models require considerable storage, driving demand for DRAM products. Moreover, faster memory is also required to run large language models efficiently and this is driving demand for High Bandwidth Memory (HBM). However, supply is likely to be a constraint as HBM memory uses about three times more wafers compared to fifth-generation DRAM to produce the same amount of bits at the same technology node. Micron indicated a few months ago that its HBM capacity for 2024 was completely sold, with most of its HBM supply already allocated for 2025 as well.

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 Revenue

• Core DRAM Revenues:
  Micron's DRAM revenue was subdued in FY'20, falling to $14.51 billion - as the market was still coming out of a state of oversupply when demand was hit by the pandemic - before rising to $22 billion in FY '22 driven by surging demand and strong pricing. The metric fell to about $11 billion as the market went into a downturn. We expect revenues to rise to almost $40 billion by 2031. 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.

BUSINESS SUMMARY

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 execution of programs. Micron has several different technologies of DRAM on the market viz. SDRAM, DDR, DDR2, DDR3 for use in the 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 that 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

NAND Flash

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 usage 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. IT managers have found that they can greatly reduce their IT spending while increasing throughput by replacing enterprise HDDs with SSDs.

Core DRAM

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 an integrated DRAM manufacturing process and owns wafer manufacturing facilities which help 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.
• 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.

KEY TRENDS

The DRAM and NAND Flash business is cyclical in nature with each cycle comprising four phases:

1. Increased demand, high profitability: The market is in undersupply with strong pricing and hence, high profitability. Profits are spent on capacity addition, with supply increasing after 8-12 months.
2. Oversupply and losses: The market is marked by oversupply and falling ASPs. The focus is on driving cost efficiencies.
3. 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 a lower capacity.
4. 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.