It is not a rare phenomenon that a company's financial figures rally at a rocket speed because of some favourable changes at the industry-level. Well, Micron (MU) is one such case where the company has gained well in revenue because of an increase in the overall prices of DRAM modules complemented by a reduction in industry supply because of a fire at one of the factories owned by SK Hynix. Also, the acquisition of Elpida gave the much required leverage to Micron in terms of expansion of production capacity.
The strong quarterly result
The first quarter saw reasonably good results because of a robust combination of Elpida and Micron that was aided by a consistent increase in the demand for DRAM chips. The giant reported a quarterly revenue of approximately $4 billion and an EPS of 77 cents per share, which beat the Street estimates by a sizable margin. As highlighted by the management in the earnings call, these record results were achieved because of timely amalgamation and efficient execution of Elpida's operations.
Heavy insider activity
Lately, there has been an unusually high amount of insider activity on Micron's shares as some big stakeholders have diluted their stake in the company in a span of approximately 30 days. Traditionally, heavy insider selling is a point of worry because it becomes a big judging point for investors and the stock price then becomes a subject of erratic actions driven by psychology rather than factual analysis. Though Micron has not succumbed to a high amount of volatility on the stock exchange, the recent insider selling should not be made a reasoning point by investors.
It is quite clear that Micron reaped huge gains from the buoyancy in DRAM demand with Elpida's production capacity on its side but the coming year can see a bit of a slowdown in demand. Additionally, the peak pricing would take a hit as the SK Hynix facility has commenced its production after recovering from the fire accident.
Industry demand and peers
Micron's biggest competitor, Samsung (SSNLF) had stepped up its DRAM production in wake of huge demand and there has been no guidance from the company on its retraction. Thus, such an expansion in overall level of production will definitely exert a downward pressure on the average price of DRAM chips and also pave way for fierce competition. For the fourth quarter, Samsung's semi-conductor division posted a decrease of 3% in operating profits on a sequential basis but for the coming quarters the company is optimistic on the industry's potential.
As leading experts have pointed out, mobile is going to be the big thing in technology for next few years and this is going to pump up the demand for DRAM chips. Samsung is already the global leader in smartphone production and if the company is able to implement cost-effective innovation in production of DRAM chips, it would pose a considerable threat for Micron.
A discussion on NAND
Since the beginning of this article I have focused on DRAM chips in the analysis of Micron's future revenue potential but a considerable chunk of its revenue also comes from the NAND memory segment. As per reports, the company is set to test the 3D NAND memory in the first half of the year which will definitely generate reasonable activity on the Street. Samsung is the largest player in this segment and has already commenced mass production of its 3D V-NAND product making Micron a pretty late entrant to the party.
The NAND memory industry is expected to boom in the next few years because of growing demand for reliable and compact memory that is offered by Solid State Drives. This report from Trefis highlights the increasing importance of SSD offerings because massive corporations are working on colossal amount of data which requires adequate storage mechanism. As of now, Micron has good exposure to both enterprise SSD and consumer SSD markets and a huge scope to effect exponential growth by sampling with different technology. For instance, the company shipped its first 20 nanometer enterprise drive to a large OEM in the first quarter.
The first quarter results of Micron have been impressive and the acquisition of Elpida at a bargain price has catapulted the semiconductor devices giant to a better position in the industry. Additionally, the company also has a robust financial position with cash and short-term investments over $3 billion and a D/E ratio of around 0.63. The management of Micron did a commendable job with Elpida's acquisition without the requirement of incurring additional cash outlay in developing its facilities.
As I already mentioned, Micron has been subject to reasonable insider selling activity over the past month but it should not be a judging point for investors as the company has strong fundamentals and reasonable financial position. The memory industry will see some swings in demand and prices over the year but there is huge long-term potential and it is prudent to have Micron in your portfolio.
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.