I was expecting chipmaker Micron Technology (MU) to move higher post earnings as the company looked set to deliver solid fourth-quarter results. However, confusion among analysts has led to a pullback of 7.60% in the stock price since Micron posted earnings. There were conflicting reports as to whether Micron missed or beat earnings estimates, but investors should focus on the company's long-term prospects rather than worry too much about recent price action.
Improvements all around
Micron posted terrific results. Revenue increased 45% year over year to $2.8 billion and non-GAAP earnings increased to $0.20 per share, reversing a loss of $0.24 per share last year. Revenue growth was assisted by the Elpida and Rexchip acquisitions. More importantly, the acquisition of Elpida doubled Micron's DRAM business.
The Elpida acquisition has increased Micron's market share in the mobile DRAM industry to an impressive 23% and has added a customer in the form of Apple. A greater share of the mobile DRAM market and a big customer such as Apple (AAPL) are long-term positives for Micron and investors. The reason is very simple - Micron is looking at an increase in both prices and demand in the long run.
It is projected that Apple will sell 50 million iPhones in the December quarter, so this is big business for Micron. This will translate into higher sales of its mobile DRAM chips. The positive pricing trends are expected to continue as well. Helped by controlled supply and a fire disruption at SK Hynix, along with higher demand, DRAM prices could rise.
Demand for mobile DRAM is projected to increase a whopping 35.5% in the December quarter. Moreover, according to Micron, DRAM supply is expected to increase in the mid-20% range in the coming two years. However, demand has been growing at a CAGR of 30% according to the company. This tells us that demand growth is exceeding supply and this should result in higher prices.
On the other hand, Micron's NAND business has been doing well also and a positive pricing trend is expected here as well. Supply in the industry is expected to grow in the low-40% range for the next two years while demand has been growing at a CAGR of 43%, as stated by the management on the earnings call.
Micron should also benefit from a decline in bit costs in the high single-digits in NAND. Also, keeping in mind the growing demand for NAND memory due to rising demand for solid state drives, Micron's revenue and margins in this segment should continue growing. Micron's SSD sales increased a whopping 76% in fiscal 2012. The future also looks bright as Micron seems to be gaining business at solid state drive makers. Two new enterprise drives were selected by key customers in the last quarter. It should also be noted that more than 50% of Micron's NAND revenue is accounted for by solid state drives and as their applications grow, so should Micron's sales.
As I had mentioned in my previous article, Micron has been bringing down its dependence on PC-related businesses. As a result of this strategy, 55% of DRAM gigabit shipments in the fourth quarter were to non-PC related businesses, with Micron shipping more than 300 million gigabit equivalents on the back of strong demand from data centers and cloud service providers.
A concern being addressed
Investors should still be a bit cautious regarding Micron's dependence on PC-related businesses to some extent. IDC forecasts a decline of 9.7% in 2013 in the PC market, worse than the earlier forecast of a 7.8% decline. IDC projects that this decline will be seen until 2015. As a result, lower demand for DRAM used in PCs could be expected.
But it shouldn't be forgotten that Micron's growing clout in mobile DRAM could help the company overcome the PC decline. Also, at a forward P/E ratio of only 7.6, Micron looks like a sweet pick even after its terrific appreciation so far this year. The stock does not trade at a premium valuation yet as the rise in the stock price has been accompanied by solid growth in earnings.
Looking ahead, analysts expect earnings to grow at a CAGR of 18% over the next five years. The demand for its products is growing and having customers such as Apple certainly helps. Growing demand from smartphones, tablets, data centers, etc. has been driving the company's growth and industry trends regarding pricing also look favorable. So investors should ignore the recent confusion around the earnings report and stick to Micron for the long run.