After an outstanding year where shares jumped more than 250%, Micron Technology (NASDAQ:MU) is set to face its first test on Jan. 7 when it is expected to report its first-quarter results, according to Yahoo Finance. Micron has an inconsistent record over the past four quarters as far as earnings are concerned, but strong prospects and the fact that it is an Apple (NASDAQ:AAPL) supplier now have encouraged investors and led to massive share price gains. Let us take a look at what is expected of Micron in the first quarter and if the New Year could be as good as last year.
Revenue expectations and the way forward
Yahoo! Finance analysts expect Micron to earn revenue of $3.27 billion in the quarter that ended in November 2013. This would be a massive jump of around 103% from the year-ago period. This expectation seems to be too high, but when considering that Micron has now completed the acquisitions of Elpida and Rexchip, a revenue boost can be expected. Moreover, it won't be out of place to expect Micron to at least meet these expectations.
Micron's position in the DRAM industry has improved greatly after the Elpida acquisition. Moreover, Micron is now seeing the benefits of becoming a key player in the mobile DRAM industry as well. According to DRAMeXchange, Micron's share of the mobile DRAM industry has increased to 23% and it now commands almost 29% of the PC-DRAM market.
Digitimes Research projected a rapid rise in mobile DRAM demand in the recently concluded December quarter. It was expected that mobile DRAM demand would rise 70% year-over-year, and this could be a major factor behind the increase in Micron's revenue.
Additionally, the Elpida acquisition helped Micron acquire an important client in the form of Apple. The iPhone 5S carries DRAM from Elpida. This should have contributed to higher sales volume in the previous quarter. According to The Wall Street Journal, Apple contractor Foxconn (OTC:FXCOF) was said to have ramped up production of the iPhone 5S to 500,000 units per day, the highest run rate ever.
Demand for the iPhone is expected to remain strong going forward. According to Michael Walkley of Canaccord Genuity, Apple might sell 54 million iPhones in the quarter ending in December. Since Micron's quarter had ended in November, a month of strong production of the iPhone 5S in December should help it keep the momentum going this New Year.
Yahoo! analysts are looking at earnings of $0.44 per share, which would be a massive improvement over last year's loss of $0.27 per share. But Micron shouldn't have much difficulty in achieving this because the company's revenue is expected to double. Also, Micron had called for favorable pricing and cost trends when it reported earnings in October.
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 drop in bit costs in the high single-digits in NAND. Keeping in mind the growing demand for NAND memory due to rising demand for solid state drives, Micron's margins in this segment should continue growing.
Potential threat, but not a big one
A fire at SK Hynix had pushed up DRAM prices as supply was down. But now, Hynix aims to cut its NAND flash production to boost DRAM production. But by the time it restores production, Micron might have already gained some business from Hynix. Micron shares had taken a hit in December when Bloomberg reported that SK Hynix was planning a new factory for DRAM memory chips. But this factory won't come into operation anytime soon, which is why Micron investors need not worry.
In spite of solid gains last year, Micron is pretty cheap. It has a trailing P/E of 19. On a forward P/E basis, Micron trades at 9.4 times earnings. So, Micron looks like a good deal since it is not expensive and has been growing pretty fast. The prospects also look strong as pricing fundamentals in the industry appear to be in its favor. Micron looks all set to continue its terrific run into the New Year and could get off to a great start with impressive first-quarter results.
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.