- Earnings will be a surprise.
- Prices are at an optimum level for growth and profitability for memory suppliers.
- Solid state drives are at a tipping point.
Micron (NASDAQ:MU) has been getting kicked around like a red-headed stepchild for the past couple of weeks.
Volatility, and even extreme volatility, is to be expected on a hot stock like Micron. I warned of this in a recent article.
I'm going to coin a term for this because I've seen it happen many times. I'm calling it the "Last Doubling Syndrome." This is where a stock has made a multi-hundred percent run in a very short period of time, but has more to go. Some investors simply feel that it can't continue and they book their profit. Some less scrupulous people finally buy the story and know that it will continue and want to buy in low. This is where the manipulation comes into play.
A side note: Manipulation is part of the stock market. It is probably less of an issue today than in the past. That doesn't mean the issue is small; just smaller than in the past. When my people whine about the market manipulation, I ask them, "If you had the money and connections and power to legally manipulate a stock price in the short term to your advantage, would you do it?" After a lot of hemming and hawing, the answer is always, "I guess so."
The note was based on scare tactics that can be summarized below:
Micron Headed for a Tumble?
-- Prices falling
-- Industry capacity rising
-- Insiders dumping
I will address all of these issues in a minute, but first let's understand who we're talking about.
First, Herb Greenberg's place in the investment business is to identify companies with accounting problems or other problems that might make them a short candidate. He is often (not always) wrong in his allegations.
One Greenberg call that I remember occurred in the 2008-2009 time period when he repeatedly accused Omnivision (NASDAQ:OVTI) of all manner of accounting shenanigans. Long story short, there were no accounting problems, the stock rose to where I thought is should be, and I sold my options for an 80 bagger. Cramer also supported Greenberg in his unwarranted criticism of Omnivision.
Maybe Greenberg is whiter than white, but I take everything he writes or says with a grain of salt.
OK, with that out of the way, we can address Greenberg's concerns about Micron item by item.
We really can't tell if all DRAM prices are falling or not (I say not). DRAMeXchange posts spot prices on PC DRAM ONLY! We mere mortals don't get the DRAM prices for mobile, data center, etc. Micron has gone to great lengths to tell us that the spot prices don't mean what they used to. This is tantamount to telling us that their contract prices are continuing to move up... albeit, perhaps, at a lower rate of increase. Costs, of course, continue to come down. The benchmark part in the DRAM business now is the 4Gb chip. That is a big difference from as little as a year ago, when the 2Gb chip was the benchmark and majority of DRAM dollars. The 4Gb chip price has been relatively stable, even in the spot market. The Micron shrink from 30nm to 25nm and 20nm is underway, and will result in continual cost reductions over the next 6-18 months.
During one of the recent investor presentations Ivan Donaldson, director of Investor Relations, was asked what might be a surprise at the April 3 earnings report. Without giving any numbers, he suggested that investors will be pleased with the mobile results.
The Apple (NASDAQ:AAPL) contract with Micron for mobile DRAM was recently renegotiated to take effect in January, and I seriously doubt that prices went down.
Apple uses about 25% of the Elpida output, about 150,000 wafers per quarter. Just a guess: if prices moved up from the old 2012 prices, they could be up a buck a chip, or about $800 per wafer. That would add $120 million of additional cost free gross profit per quarter... $.11/share.
Most of the dollars in NAND are going into SSDs (solid state drives), so DRAMeXchange tells us nothing about the largest dollar value on NAND; the 128Gb chip. 64Gb and 32Gb is probably no more than 10% of the current NSND business, so who cares what the price on those parts is? All the NAND companies build SSDs and therefore, retain a high percentage of their NAND output for in-house use, so the prices on the street are not reflective of the real value of NAND configured as SSDs.
The SSD business, to a large degree, had been waiting for the 128Gb MLC part. The Micron/Intel (NASDAQ:INTC) joint venture-developed 20nm 128Gb chip only became available in early 2012. So, 2012 established a ramp on 128Gb chips for SSDs. In July of 2013, the Intel/Micron 16nm HKMG 128Gb chip was introduced and is now being ramped to full volume. By the middle of 2014, with the new chip in high volume production, a tipping point in SSDs will be enabled. The $5 cost, 16nm part will enable $100 very high performance 128GB SSDs at 65% gross margin.
When computer users understand the advantages of SSDs, the demand for them and the NAND memory from which they are made will be insatiable.
So the dynamics of the memory business is something that Herb Greenberg and Jim Cramer simply don't understand very well.
Capacity "quietly rising":
Everyone has known for a year that Samsung is building a big new NAND fab in China. It is supposed to be for 3D NAND, but that appears to have changed recently because its 3D NAND process is not economic (might have something to do with that cheap 16nm planar part from Micron). The fab will probably be for 2D NAND, again to support its own SSD business.
There are continuing shrinks happening in both NAND and DRAM, but the bit increases are actually less than the expected bit demand increases. A year from now, as the SSD tipping point becomes obvious, the big discussion will be "where is the NAND production going to come from," and NAND prices (big chips anyway) will be going up dramatically in price to temporarily stem demand for SSDs.
We can go back a few years to the Singapore NAND fab that was shared with Intel in the IMFT joint venture. The fab was designed for 100,000 WSPM, but it came on line about 20,000 wafers at a time as demand increased. These fabs don't have to go from zero to full bore overnight. That is some artifact of memory industry thinking a decade ago. What's new in the memory business is the ability to control output and only add what is necessary to satisfy demand.
Management "dumping shares"
This is Greenberg's favorite scare tactic. I won't explain my thoughts on insider selling... I've done that too many times.
Here's the data:
Look at some form 4s
Mark Durcan, CEO, holds 2.4 million shares + options
Mark Adams, President, holds 475,000 shares + options
Ron Foster, CFO, holds 1.4 million shares + options
Brian Shields, VP of WW ops, hold 250,000 shares and 250,000 options.
Management sells shares; they have need for money just like the rest of us. Some of these guys are no spring chickens. The important point is that they retain very high quantities of shares and options.
Greenberg claims that Micron management is exercising options, "before they have to." Since exercised options are taxed on the difference between the option grant price and the share price at exercise, early exercising could be construed as bullish in that the option holder could pay less tax by exercising early, particularly if he intended to hold the shares long term and expected the stock price to rise.
There have been no big sales recently, so I wonder, where is Greenberg getting his "information"?
Things aren't like the old days when insiders paid taxes only when they sold the shares from option exercises Now when insiders exercise, they have substantial tax liabilities. That causes them sell shares to pay the taxes on the exercise. Since now they have a real risk of losing their own money, many sell more shares than required to pay taxes. I would do the same.
Micron management not liquidating ,and Greenberg saying they are is insulting your intelligence.
Here's my simplistic bar napkin view of the deal for April 3rd earnings:
IR is now talking 600,000 wafer starts per month; 1,800,000 per quarter. There is no depreciation in Elpida wafers, which is half of the DRAM production, so figure an average cost on DRAM wafers of $1350. NAND is something less to produce than normal DRAM ($1500), so they are about $1400 cost. So, the 1.8 million wafers will cost $2.46 billion. Micron should be able to get about $2500 on the average DRAM wafer. NAND wafers should average out at about $2300 per… maybe more as SSD, but some wafers go to Intel at cost, so do some gives and takes. I think there is close to $4.38 billion in sales. $665 all-in operating costs = $1.254 billion/1.2billion shares = $1.05/share.
In my opinion, the recent mud-slinging at Micron is unwarranted, so don't let the Wall Street machine scare you out of your shares. This is one of those rare cases, I believe, where after this earnings report, the shares will trade in a much higher range while working their way to $40/share or more.
Holding shares through all the noise will give you grey hair, but if you are right, you can say you beat the street manipulation on this rare opportunity.
Micron is a much different and much larger company than only a year ago.
Disclosure: I am long MU, INTC. 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.