Micron Technology (
), one of the leading manufacturers of memory products (DRAM,
NAND & NOR), will report its Q1 2014 earnings on January
7. Macro weakness, the demand-supply imbalance, intense
competition and declining selling prices lowered the company's top
line growth and impacted its profitability in 2012. However,
consolidation in the industry, rising demand from non-PC markets,
and improving memory product prices returned Micron to
profitability (net income $1.2 billion) in fiscal 2013. Excluding
the gain realized from Elpida, Micron's full year operating income
improved to $236 million compared to an operating loss of $612
million in fiscal 2012. (Read:
Micron Reports A Strong Quarter With Elpida On
) Consensus revenue estimate for the fiscal first quarter
(fiscal years end with August) is $3.7 billion, roughly twice the
prior year level. Of greater interest, however, is the durability
of this recovery as we head into 2014.
With the acquisition of mobile DRAM manufacturer Elpida,
improving market dynamics, and the upturn in memory product prices,
we think that Micron will continue to grow in 2014. With a large
and diverse memory product portfolio and the second largest
installed manufacturing capacity, Micron is in a strong position to
benefit from the improving industry dynamics. Nevertheless,
the memory product prices are extremely unpredictable and thus we
maintain a cautions outlook for Micron.
Our price estimate of $1
is at a 30% discount to the current market price of $21. We will
update our valuation after the Q1 2014 earnings release.
See our complete analysis for Micron here
The memory market is highly cyclical in nature. Excess
manufacturing capacity, combined with slow demand for PCs,
lowered the profitability of memory products in 2012.
However, the industry consolidated in 2013 and Micron claims
to be seeing growing strength in its DRAM and NAND memory
portfolio. With manufacturers holding back supply and improving
macro environment fueling demand, the market dynamics in the
industry are improving.
Micron along with other market players are focusing on
leveraging their present technologies to deliver value-added
devices to their customers. Capital spending in the DRAM market in
the last few years has been more focused on technology
migration rather than on building new capacity. In the NAND
space, a significant portion of the capital spend by Micron is
being utilized for transitioning the additional fab capacity from
DRAM to NAND. In addition,the company is investing even more
in building greenfield cleanroom floor space and an early pilot
line for 3D NAND.
Rising Memory Product Prices
Memory products prices have significantly improved in the last
few months as strong demand for DRAM and NAND products, coupled
with their restricted supply, has eased downward pressure on
prices. According to Bloomberg, the prices of memory chips have
increased 19% in October this year subsequent to the fire at SK
Hynix's factory in China.
Since manufacturers are devoting their capacity to produce
mobile DRAM products, commodity DRAM products have been in short
supply. Thus, buyers are building up their commodity DRAM inventory
to avoid any potential supply shortage in the
future. Additionally, while the suppliers have not increased
their manufacturing capacity, the demand for NAND is increasing due
to rising mobile and SSD shipments and higher memory content in
The trend might not last in the long run as the underlying cause
for the price rise is more due to the strategic move of OEMs rather
than any fundamental change in market demand for commodity DRAM.
Micron stated in its analyst conference that there was some
softening in NAND and DRAM prices last quarter due to low volumes
on the spot market. However, the company's exposure to the
spot market is is very low and its OEM contract pricing has
remained pretty strong and stable.
Acquisition Of Elpida To Double Micron's DRAM
In July this year Micron closed its acquisition of Elpida,
which declared bankruptcy in February 2012 due to mounting
debts. In addition to acquiring 100% of Elpida's equity,
Micron also gained control of 24% share of Rexchip Electronics
Corp. from Powerchip Technology and some of its affiliates.
Together with Rexchip shares acquired from Powerchip, Micron now
controls approximately 89% of Rexchip's outstanding shares and 100%
of its product supply.
The fab assets acquired from Elpida and Rexchip will increase
Micron's current manufacturing capacity by approximately
45%. Micron is expected to have the second largest installed
capacity by the end of this year. A bigger scale will better equip
Micron to service large customers.
Samsung and SK Hynix were the top two players in the DRAM
market with shares of 37% and 26%, respectively. However, as
per research firm IDC, Micron and Elpida together account for 28%
of the market, making Micron the second largest DRAM player behind
In addition to becoming the second largest DRAM manufacturer,
the acquisition of Elpida will help Micron expand its footprint in
the mobile DRAM market, the fastest growing DRAM segment. Though
Micron is the leader in enterprise DRAM solutions for
networking and servers, it currently generates less than 10%
of its revenue from mobile DRAM. Elpida on the other hand has a
strong presence in mobile DRAM and targets mobile phones as well as
The inclusion of one month of Elpida's results accounted
for approximately 20% of the total DRAM bit shipments in Q4
Understand How a Company's Products Impact its Stock Price at