Micron (MU) has introduced a new accelerator to increase the production of enterprise storage platforms. The product uses DRAM and Micron's MLC NAND. The solution accelerates the performance of data centers for online transaction processing and virtualization. In this article, I want to show how the pressure on both DRAM and NAND memory products will not enable the accelerator to improve Micron's price multiples.
Why will Micron not achieve sales growth with the new accelerator? The memory market suffers from excess supply and is cyclical. Along with the intense rivalry in the sector, the price of DRAM and NAND memory products is under pressure. The falling price has led to a 30% slide in Micron's share price since March last year. This situation will not allow the new accelerator to boost Micron's numbers.
In the 2013 second quarter report, Micron recorded net sales of $2.1 billion, compared with net sales of $2.0 billion for same period in the year prior. Though NAND and DRAM product revenues increased, the company recorded a net loss of $286 million, compared with a net loss of $275 million for the first quarter of 2013.
"We are pleased with the overall improvement of our operational performance and excited to see the effects of our restructured partnership with Inotera drive bit shipment growth during the quarter. We believe the resultant increase in capacity from existing industry production will provide us the scale we need to reinforce our leadership position," said Micron CEO Mark Durcan.
In the first quarter, revenue from NAND flash products were 4% lower compared to the fourth quarter. Revenues from the sale of DRAM products were 9% lower compared to the fourth quarter. Micron reported a net loss of $275 million, compared with a net loss of $243 million for the fourth quarter. Net sales were $1.8 billion, compared with $2.0 billion for the 2012 fourth quarter.
Micron in the past has launched many products to accelerate data centers and servers. The SC12 Dean's List features accelerators for processors. The Enterprise SD is an ideal solution for web acceleration and media streaming. The Client Solid State Drive also acts as an accelerator. They did not boost Micron's revenues or improve the price multiples of the company.
The new accelerator enables performance that allows for quick response times to information needed in data center environments. Tested against rival products in a MySQL server, it was faster and more consistent than others. "The P420m is a true workhorse - it delivers where performance matters most," said Ed Doller, VP and general manager of Micron's Enterprise SD Division. "Introduction of the P420m is a testament to our commitment to storage innovations for all levels of integration."
Micron needs the data center accelerator to increase sales. Unfortunately, it cannot drive sales due to the pressure on NAND and DRAM product prices. And when we took a look at the latest financial report from the company, we noticed the products could not prevent quarter-over-quarter decline. It is clear that the NAND and DRAM product revenues have not improved the company. So it can be said that the company is having problems making progress.
With a price to sales ratio of 1.19, Micron is trading cheaply, not surprising given its gross margin of 17.61%. However, the introduction of the new accelerator cannot improve Micron's forward PE of 15.14 nor lighten the effects of a $3.65 billion debt.
How is Micron performing in relation to rivals? With an EPS of -1.12, compared with 2.15 for Oracle (NYSE:ORCL) and 14.50 for IBM (NYSE:IBM), a gross margin of 17.61%, compared with 45.62% for IBM and 80.84% for Oracle, Micron is not doing as well as the others. Oracle's Business Accelerators are in competition with Micron's new product. Oracle's products are powerful and easy-to-use cloud-based tools. Micron's only accelerates enterprise servers and storage applications. IBM has a solution for SAP Accelerators, which provides a picture of customers' business from different data perspective. Micron's product does not have this feature.
Looking at the previous performance of Micron's NAND and DRAM products, we can say the new solution will not improve the fundamentals of the company. Analyzing Micron's price multiples in relation to Oracle and IBM, the worsening figures, and the state of the NAND and DRAM market, we can say the company is not a buy for now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.