Micron Technology (MU) is the last remaining DRAM memory manufacturer in the Western Hemisphere. Subsequent to the closing of the purchase of Elpida, Micron will become the second largest DRAM manufacturer in the world, second only to Samsung (SSNLF.PK).
Micron plays in a market that is about $50 billion or about 17% of the total worldwide semiconductor market. At $8 billion in sales (depending on prices), Micron is about 16% of the memory market. After the Elpida acquisition that market share will grow to 24-30%.
Micron has suffered with the rest of the memory manufacturers over the past several years. Prices of DRAM and NAND memory have declined to an extent that is difficult for people outside of the business to grasp. The price of a 1 Gigabit DRAM chip has declined from about $3 to $.68 today. Doesn't that just take your breath away?
Now for some plain talk about the memory business:
There are sellers and buyers of memory. Between those two there is only one baseball bat. Sometimes the customer swings the bat and literally pounds down memory prices so low that most suppliers have left the business, usually in corporate body bags. Then suddenly, the worm turns and the memory sellers get their turn at bat. If there is any hint of a product shortage, however small, the price of memory goes higher. Sometimes the price increases are as brutal as the previous price declines. The suppliers rise from their beaten down position and transform into a Green Hulk, but with a very bad attitude. There is utterly no sympathy for the buyers of memory. It is their turn to absorb the pricing blows. This game has been played out since about 1970 when the state of the art DRAM chip was a 1K chip (1024 bit) to today with 4 Gigabit chips. That first 1k memory sold for $8 each. The 4 Gb chip sells today for about $2.40. Yes, that is right; a memory chip with 4 million times the bit content sells for 30% of that old 1K chip. That, my friends, is the productivity of the semiconductor industry at work.
OK, now we can begin to talk about the pivot that I think is underway for Micron Technology. This has a lot of the characteristics of a virtuous "perfect storm" for Micron. First, the market price of DRAM has increased 50% since the beginning of December, and NAND is up a smaller amount . On top of that, both DRAM and NAND memory are finishing up a transition to the next lower process node. When this happens the manufacturing cost of memory declines by something like 50%. On top of that, it looks like demand in all categories is beginning to heat up. If so, the brutal price increases will continue.
According to my numbers, revenue for Micron for their 2nd quarter should be about $2.2 billion; cost of goods should actually decline to about $1.5 billion. Gross profit should be about $700 million. R&D, SG&A, interest, and taxes will reduce that by about $435 million. Net earnings for the quarter should be about $235 million or about $.23 per share.
Now for the punch line: The Street, according to Yahoo Finance, is expecting a loss of $.20!
2nd quarter earnings will be released around March 20, there are no less than six investor conferences from now to then.
After the closing of the Elpida deal, there will be three DRAM suppliers in the world, Samsung, Micron, and Hynix in order of size. With all the pricing "loose cannons" gone, that baseball bat will stay in the hands of the three memory suppliers for the foreseeable future. For Micron these price increases will continue to drive sales to over $3 billion per quarter with no additional, or even lower, unit costs.
The company is capable of annual earnings of $4+/share. At less than $8, the shares are cheap.
Disclosure: I am long MU.