Micron Technology (MU), one of the leading global manufacturer and marketer of memory products is set to announce its Q1 2013 earnings on Thursday, December 20, 2012. The memory market is highly cyclical in nature and is currently seeing an excess supply situation. The demand-supply mismatch and the increasing competition in the memory market has further put downward pressure on both the DRAM as well the NAND memory product prices.
However, despite these tough macro conditions, Micron has managed to hold its ground while many of its competitors have have had to sell out or shut down operations due to mounting losses. Micron remains the only major U.S. memory chip-maker in a market increasingly dominated by Korean and Japanese manufacturers such as Samsung (OTC:SSNLF) and Toshiba.
Micron closed its fiscal 2012 with a 14% increase in NAND Flash revenue and a 12% decrease in revenue from DRAM products. Overall, the company posted a net loss of $1.03 billion on net sales of $8.2 billion for the fiscal year ending August 30, 2012. Though with the consolidation in the industry, certain amount of supply has come offline, the demand has yet to pick up to a level to stabilize the memory market.
While we do not expect the situation to be significantly different in Q1 2013, Micron’s declining inventory levels for all the three divisions – NAND, DRAM and NOR – reinforce our belief of the market improving next year onwards.
Micron Could Benefit From Consolidation In The DRAM Market
Contributing close to 50% to our Micron valuation, DRAM remains the most important division in the company’s portfolio. Increasing competition in the memory market, combined with soft demand on account of macro headwinds and the slowing growth in global PC shipments has put the DRAM industry in an oversupply glut. The demand-supply mismatch has further put downward pressure on DRAM selling prices, leading to a decline in DRAM gross margins.
Micron registered a 9% sequential decline in its revenue from DRAM products in Q4 2012, due to a 9% decrease in sales volume. Additionally, the persisting weakness in the PC market further deteriorated the DRAM market prices in the quarter, though the company’s net DRAM ASP was essentially flat due to an improvement in product mix.
However, with the growing popularity of ultra-thin notebooks, strong growth in server shipments and the proliferation of DRAM in mobile devices, we expect to see an improvement in demand 2013 onward. Additionally, with the acquisition of Elpida Memory, Micron’s market share could almost double, making it the number two player in the DRAM market, behind market leader Samsung. Micron targets to complete the acquisition by the first half of 2013. (Read: Micron Inches Closer To Acquiring Elpida With District Court Approval)
Apart from the direct gain in market share after acquiring Elpida, we expect Micron to benefit from the consolidation in the DRAM market which could stabilize the decline in selling prices in the future.
Possible Improvement In NAND Flash Prices
Micron’s average selling price per NAND Flash Gb of NAND witnessed a drastic decline between 2006 to 2011, from $3.12 in 2008 to $1.51 in 2011. While a further decline in selling price eroded the slight increase in revenues from the sale of NAND flash products in Q3 2012, an improvement in the same made up for the 11% and 12% sequential declines in NAND sales volume and revenues in Q4 2012, respectively.
In an interview earlier this year, Micron’s CEO said that he expects the rapid decline in NAND prices to ease down in 2013 as the industry witnesses increasing market consolidation and significant production cuts in the current year.  With the robust growth rate in mobile devices as well as the strong NAND content growth across all devices, the future prospects of the global NAND flash market looks promising.
We believe that intense competition amid the soft macro environment will continue to put a downward pressure on price. However, even a slight variation from our price estimate could have a significant impact on Micron’s overall valuation. Thus, a potential improvement in NAND Flash prices is something that we would watch out for in the Q1 2013 quarter earnings.
Growth in Mobile Devices To Drive Demand for NAND and Mobile DRAM
With the slowdown in growth in the PC market and the rapid rise in global shipments for mobile devices, smartphones and tablets will be the key growth drivers in the semiconductor industry. The growing demand for mobile devices will further lead to an increase in flash memory content for such devices, fueling growth in NAND and mobile DRAM sales.
We are witnessing strong NAND content growth across devices with the average content in USB flash drives expected to grow at almost 50%, close to the historical growth seen in these segments.
According to iSuppli, the tablet consumption of NAND flash is estimated at 2.3 billion gigabytes (Gb) in 2011, an increase of 4 times from 476.8 million Gb in 2010, and NAND shipments for tablets are forecast to reach 12.3 billion Gb by 2014.  We estimate the total NAND flash GB sold worldwide to cross 750 billion by the end of our forecast period.
We will update our price estimate of $4.65 for Micron Technology post its Q1 2013 earnings release.
- Micron CEO sees higher NAND prices next year, Reuters, August 14, 2012
- NAND Flash Consumption in Tablets to Rise Nearly 400 Percent in 2011, iSuppli Press Release, February 11, 2011
Disclosure: No positions