After a 200% gain in a year, does Micron (NASDAQ:MU) have another double in it?
The first article I wrote about Micron was "Micron: Two Things To Know About Micron" on September 27, 2012. The stock price closed at $6.02 on that day; it closed at $18.10 on Friday November 8, 2013.
I remember thinking that, given the low and declining price of both DRAM and NAND memory, the company was headed for bankruptcy before closing on the then pending Elpida deal OR the price of memory had to turn around quickly and significantly. If the price of DRAM didn't increase, both Micron and Elpida would go down and the world would be left with only two DRAM manufacturers; SK Hynix (OTC:HXSCL) and Samsung (OTC:SSNLF), both in South Korea, about 84 miles south of the DMZ, north of which insanity reigns supreme.
I decided that the scenario where both Elpida and Micron went bankrupt was so terrible for the industry that it simply could not be allowed to happen. Things that "simply cannot be allowed to happen" generally don't happen. It seemed that Intel was doing some unusual things in support of the Micron acquisition of Elpida and Apple had recently given Elpida large orders for mobile DRAM so it appeared that Apple would play a role in saving Elpida.
Given all that, I opened a small speculative position in Micron and watched the progress. DRAM price continued to decline until Dec 3, 2012. From that date forward DRAM began an unprecedented rise in price from a contract price for the benchmark 2Gb chip of $.77 to a current contract price of over $2 for the same chip today, an increase of 165%. By the middle of January 2013, the recovery in memory prices seemed real and the stock price was in the mid $7s, so I increased my Micron stake substantially.
Since then I have watched the analyst community raise their target price on Micron to $8, 9, 10, 12, 14, etc., etc., until today the high price target is $30.
So, where are the analysts today?
33 analysts earnings estimates for FY 2014 (ending August 2014) range from $1.07 to $2.95 and FY 2015 (ending August 2015) is no better at $1.03 to $3.56. Revenue ranges are $12.71 to $17.49 billion and $12.89 to $19.84 billion for the two years. Obviously there is no analyst consensus on the future of Micron
About six months ago Micron president, Mark Adams, alluded to the company going, "from an 8 billion clip to a 16 billion clip." Not dollars, but "clip". I don't think the analysts present caught that. Memory prices are much higher since that comment, so I'm leaning closer to the $20 billion revenue number.
Since the analyst community doesn't seem to provide much help on Micron, let's see if I can make some rough approximations of my own.
The benchmark DRAM today is the 4Gb chip and the NAND benchmark chip is the 128Gb chip headed for solid state drives.
The DRAMeXchange latest contract price for the 4Gb DRAM part is $3.69. We need to understand that this is the part that is used in the PC market and is the lowest priced 4Gb part. Mobile DRAM and DRAM used in data centers carry a higher price. In the case of mobile DRAM the Apple (NASDAQ:AAPL) Bill of Material claims the price for 1GB of mDRAM (two 4Gb chips) at $10.45 or about $5.20 per chip. I will take a wild guess for the average current market price for all types of $4Gb DRAM today of about $4.25. This is the equivalent price that Micron will trend to on future contracts. Assuming that prices stabilize at today's level, it would take another 6-9 months for the total business to reflect these prices.
A 300mm wafer will produce about 800 4Gb chips. At $4.25/chip, each DRAM wafer, if priced at today's market price, would produce $3400 of revenue.
DRAMeXchange doesn't have a contract price for 128Gb NAND chips so we have to do some more estimates based on the price of 128GB solid state drives. Prices for these SSD devices range from $111 to $152. Since eight 128Gb chips will make a 128GB SSD (plus a few dollars worth of misc components), another wild guess for the market price of a 128Gb NAND chip would be between $9 and $10, so I'll use $9.50. Since NAND didn't have the crazy price decline of DRAM, it will take less time for the average sale price of Micron to reflect the current market price of 128Gb chips. A 300mm wafer will produce about 260 128Gb chips. At $9.50/chip, each NAND wafer, if priced at today's market price, would produce about $2500 of revenue.
Now, with the addition of Elpida, about 70% of the wafer output of Micron will be DRAM and other specialty memory, 30% will be NAND. The blended price pre wafer would be about $3100 at equilibrium. It is pretty reasonable to believe that Micron's prices will continue to rise, as contracts are renewed, toward that $3100 price. It further should be pointed out the sales increases based solely on price increases tend to flow unimpeded to the bottom line.
Below is chart of historical financial results of Micron up to today, and projections for the future. The numbers are presented in terms of revenue and profit or loss per wafer. Q1 2014 and Q2 2014 I am assuming that average prices will increase 10% each quarter. Q3 2014 and Q4 2014 I am assuming 7.5% and 5% price increases.
|Fiscal Qtr.||Mo-yr.||Rev B$||P/L mil$||Wafer Prod Mil||Notes||Rev per wafer $||P/L per wafer $||EPS $|
Note 1: Wafers out include two months of Inotera
Note 2: Wafers out include three month of Inotera
Note 3: Includes one month of Elpida
Note 4: Includes first full qtr. with Elpida. I've tried to estimate what q4 would have been with 100% Elpida and put a 10% growth on that number. I'm figuring the qtr. would break out about $2.9billion for Micron and $1 billion for Elpida due to lower ASPs.
Note 5: Wafers out minus 50,000 300mm equivalent Italian wafers
Note 6: Price growth rate declines to 7.5%
Note 7: Price growth rate declines to 5% as market price and contract price approach equilibrium.
Looking at the chart, we can clearly see the bottom in memory prices during the November 2012 quarter and the remarkable turnaround in the February 2013 quarter. We can also see that Micron, as a company, has not enjoyed the 165% increase in DRAM prices that are reflected in current contract prices and still has some substantial progress to go to get to that point.
I haven't included taxes in the increased earnings since no cash taxes will be paid and I don't have a clue what the tax rates will be when taxes are paid.
Since there is no reason for an increase in operating expenses, I have made no allowance for that, knowing full well that, given more cash, a company will find a way to spend some of it.
There is an incredible amount of positive leverage being applied to the combined Micron/Elpida operations and the good news should keep coming for the foreseeable future.
Disclosure: I am long MU. 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.