Micron Technology: Getting Ready For Another Bull Run

Oct. 8.13 | About: Micron Technology (MU)

With chipmaker Micron Technology (NASDAQ:MU) set to report its fourth-quarter results Thursday this week, the question on investors' minds will be whether it can continue its stellar run or not. The answer might be in the affirmative as even after gaining a whopping 200% so far this year, Micron looks set to continue its journey skywards.

What to expect?

Even analysts at Citigroup probably think the same as they raised Micron's price target to $30 from $19. With Micron trading pretty close to $19 currently, this upgrade suggests that it can go up by another 60% approximately. And there are good reasons to believe that Micron will be able to deliver even though the earnings estimates are pretty high this time.

According to Yahoo! Finance, analysts expect Micron to earn $0.25 per share on revenue of $2.70 billion in the fourth quarter. In comparison, last year, Micron posted a loss of $0.24 per share on revenue of $1.96 billion. Hence, the year-over-year comparisons seem very optimistic. But after looking at the various catalysts the company is enjoying, there's a solid chance that it would satisfy expectations and guide for a better performance going forward.

Fourth-quarter revenue would include the acquisition of Elpida and Rexchip and possibly help Micron achieve the 38% year-over-year growth analysts are expecting. In addition, propelling the company's revenue and earnings higher will be two simple factors -- greater demand and better pricing.

Positive developments

Demand will be helped by the fact that Elpida is a supplier of memory chips to the latest iPhones. This should be great news for Micron investors, as the iPhone 5s and the iPhone 5c have started off really well with nine million units sold in the first three days. Going by statistics revealed by a Digitimes report, a total of 50 million iPhones (both the 5s and the 5c combined) are expected to be manufactured in the last quarter of the year.

Since Micron is now a supplier to Apple for the iPhones, the ramp up in production of the iPhones will certainly be a tailwind for it. Demand will be further helped by growing sales of solid-state drives (SSDs). According to estimates from iSuppli, SSD shipments are estimated to grow at a CAGR above 30% over the next three years followed by a growth in the high teens from 2017. This expected growth in sales of SSDs will lead to higher demand for Micron's NAND chips.

Another factor aiding demand for Micron's chips might be the fire that hampered production at SK Hynix's factory in China last month. On one hand, this fire might help Micron gain more business at Apple since Hynix is also a supplier of memory chips for the iPhones, while on the other, this disruption seems to have pushed up prices of memory chips further.

According to Reuters, the contract prices of dynamic random access memory (DRAM) chips increased 9% in the second half of September from the first half of that month. In comparison, spot prices jumped an amazing 37% during the same time period. UBS estimates that overall supply in the DRAM market will shrink around 7% as a result of the fire at SK Hynix. The price rise could continue till at least November, when normal operations are expected to be restored at SK Hynix.

Moreover, Micron's own guidance regarding average selling prices (ASP) and bit costs was quite positive in the previous conference call. Micron had said that ASPs would increase in the mid-to-high single-digits in the fourth quarter from the third quarter. In addition, the company had forecasted an increase in production volume. In NAND, bit costs were expected to decline in the high single digits and shipment volumes were expected to increase in the fourth quarter.

Micron has been gradually reducing its dependence on PC-related markets as well. Shipments to non-PC customers now account for around half of its total bit shipments. The company is seeing robust demand for mobile DRAM and NAND chips, driven by higher sales of smartphones and tablets. Micron management had claimed that its mobile DRAM chips were being tested by top smartphone manufacturers in the previous quarter and this is an endorsement of the company's bright prospects.

A slight concern

As mentioned in the previous paragraph, Micron has been reducing its dependence on PC-related businesses. However, this doesn't hide the fact that PC-related businesses still contribute to Micron's revenue. Now, as the PC market has been in a decline, DRAM demand has followed suit.

IDC expects the PC market to decline 9.7% in 2013, which is greater than the earlier forecast of 7.8%. IDC is of the opinion that this decline will continue until 2015, so one can expect lower demand for DRAM used in PCs. This might weigh to some extent on Micron. However, with the rising use of mobile DRAM, the company might be able to mitigate losses from PC DRAM.

Another bull run

Micron is like a car running on a turbo-charged V8 engine as it can rev higher even after appreciating more than 200% this year. Higher demand, increased pricing, and falling costs signal that more is to come from this outperforming stock. Even analysts are quite bullish as they expect earnings to soar 964% in fiscal 2014 (ending in August next year). Citigroup's upgrade is another stamp of approval and Micron investors should prepare themselves for another bull run.

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.