Micron Technology (MU) dropped lower to $22.77 versus $23.08 last week. The leading provider of semiconductor solutions was unable to escape the heightened anxiety of investors as they anticipate the results of the Federal Reserve policy meeting which is expected to help the stimulus initiative geared towards reviving the U.S. economy. Dow Jones Industrial Average (DJI) fell 0.06 percent while S&P 500 and Nasdaq Composite (IXIC) lost 0.31 percent and 0.15 percent, respectively (yahoo). This temporary setback on an impressive stock price streak is temporary as this is expected to level up after the Fed makes the announcement about their next steps concerning the stimulus package. The share price, which is still 244% versus a year ago is not a matter of concern but rather an opportunity for investors to buy more stock in anticipation of higher prices in the coming months.
In my previous article, I listed down key reasons why it would be wise to go long on Micron Technology Inc. I cited strong revenue growth, excellent stock performance and favorable earnings per share growth as major conditions which may appeal to investors seeking a long term investment. The 10% revenue growth is a good indicator for the company as competitors lagged behind with slower growth rates. The gross margins and earnings per share growth are also growing which both contribute to the high regard that investors are putting onto the stock.
Increasing Capacity through Elpida Acquisition
The recent increase in demand is primarily driven by the drop in supply due to the fire which destroyed SK Hynix (OTC:HXSCF) manufacturing facility in China in September. The facility is not expected to resume operations until January 2014 and will need more time to revert to its original output and quality levels. However, it is good to know that the increase in demand which pulls product prices higher is expected to continue in the coming years as companies and other entities require more to support their operations. To support this anticipated surge in memory demand, Micron has strategically purchased the Japanese manufacturer Elpida, which can help it deliver 300mm DRAM. With this, we can see that the macroeconomic and microeconomic conditions favor Micron's business. The demand which is driven externally is managed well by the company through by making sure that they will be able to deliver majority of it. This could further boost the company's gross margin which is set at 30% last quarter.
Innovating through Win-Win Partnerships
Micron has announced collaboration with Broadcom Corporation (BRCM) to develop a solution for the DRAM timing challenge. As the global IP traffic grows at a compound rate of 23 percent, there is a need to find innovative solutions to curb restrictions in data output. The solution, as confirmed by Broadcom, improves operations by 18 percent per second by reducing the timing challenge from 35ns to 30ns. This may sound very little but we have to bear in mind that the context here involves high performance applications and massive amount of data. The partnership, with Micron providing the solution and Broadcom delivering the high-bandwidth capacity at the required scale, is set to alleviate the challenge faced by customers in data management not only today but in the future as well.
Micron is a "Strong Buy"
As Micron aligns itself more with developing what its customers need and arm itself with the capacity to deliver it, it is able to enjoy continuously better financials and stock valuation. The economics governing this success is not rocket science. As the world advances in technology, data management and networking become key inputs for any business which translate to higher demand. The demand for efficient and high capacity memory systems is steep and will continue to do so in the coming years. Naturally, the demand will lead to higher prices which will translate to higher profits for a company which is able to deliver the technology efficiently.
As for the microeconomic picture, Micron's is a leading manufacturer which means that it is in the forefront of both innovative solutions in memory systems. The solution they are working with Broadcom to reduce the timing challenge is one of the game changing ideas in the industry and could drive more customers to prefer it over competitors.