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Summary

  • Micron shares have dropped despite solid results.
  • Micron’s prospects are still strong as the trends in the DRAM and NAND industry are favorable.
  • Micron is still cheaply valued relative to its solid earnings growth.

It has been almost a week since chipmaker Micron Technology (NASDAQ:MU) released its fiscal second-quarter results. As I had written in my earnings preview, Micron looked set to report strong results, and it didn't disappoint. In fact, the company widely outperformed consensus estimates by posting year-over-year revenue growth of 98% to $4.11 billion. However, Micron shares are down around 8% since the company released its results, primarily due to overall weakness in the market.

In my opinion, investors should definitely consider taking advantage of this opportunity and strengthen their Micron positions. Micron has a positive outlook for 2014 and ahead, driven by a strong recovery in DRAM and NAND chip prices along with robust demand.

Favorable trends

The diversification of the chip market from personal computers to smartphones and tablets has opened a new spectrum of opportunities for Micron to capitalize upon. The company is now switching production lines to make NAND chips used in smartphones and tablets from DRAM chips that were used in personal computers.

The DRAM business is performing strongly with stable revenue and strong gross margin expansion. Moreover, specialty DRAM markets such as server, consumer, and graphic segments are also seeing excellent growth in bit shipments.

The outlook for memory industry remains favorable. There is a stable supply situation and favorable market conditions because of lower supplier and customer inventory across multiple segments, coupled with the reduction in DRAM capacity while converting the Singapore facility to NAND that has led to an overall stable supply situation.

In addition, DRAM industry wafer production is expected to be down in the mid-single digits in 2014 due to DRAM to NAND conversions, and the ongoing increase in process complexity as the size of chips shrinks.

Also, demand should remain strong and Micron projects DRAM to grow at a CAGR in the range of mid 20% to 30% that implies continued favorable market conditions, and a reduction in volatility compared to historical DRAM trends. For NAND, industry growth is projected in the low 40% range for 2014. This includes a 10% increase in industry wafer production.

Also, with 3D NAND production becoming more predominant, a subsequent reduction in wafer output is expected as additional space will be required for building 3D NAND.

Micron is very bullish on the future of NAND flash and believes that this will be a very healthy growth market. Moreover, Micron's NAND process technology is well-positioned to tap this demand and the company is successfully ramping yields of its 20-nanometer and 16-nanometer technologies.

Product innovation and market opportunity

Micron is also working on some exciting new products and recently launched a PCIe SSD solution that it believes is the best in the industry. In addition, Micron is taking concrete steps to strengthen its high performance MLC and SLC components in value-added segments and sockets such as enterprise SSD and mobile eMMC in automobile applications. Micron is also adding resources and controller firmware, and software and packaging technologies to support this effort.

In addition, Micron's server business is on a roll and achieved 68% year over year bit growth in the second quarter. Micron is providing its key server customers with unique solutions to help differentiate their products. It is working on HMC, or hybrid memory computing, enablement with key server customers. It has also achieved DDR4 validation at key chipset partners and is beginning volume production.

In addition, Micron's networking business is a segment where it is seeing attractive returns. Its strong position in networking applications is a result of its cutting-edge solutions and excellent customer relationships. Also, DDR4 enablement with its key chipset partners will drive further differentiation for network solutions. The LTE roll out in China and continued cloud and datacenter growth are also expected to drive demand.

Valuation

Parameter

Micron Stats

Trailing P/E

13.63

Forward P/E

7.58

PEG Ratio (5 yr expected)

0.79

Profit Margin

16.16%

Earnings growth CAGR (Next 5 years per annum)

10.25%

Source: Yahoo! Finance

Micron's trailing P/E and forward P/E ratios of 13.63 and 7.58, respectively, indicate extremely healthy earnings growth prospects going forward. Also, its PEG ratio is also impressive at 0.79, which suggests undervaluation. Micron also enjoys a healthy profit margin of 16.16%, and this could improve as the company is seeing favorable pricing and cost trends. In addition, the earnings growth CAGR for the next 5 years is 10.25%, which shows healthy growth.

Conclusion

Hence, Micron has a lot going in its favor and its valuation is also quite favorable. So, investors should capitalize on the recent drop in share price and buy Micron for the long run.

Source: Micron: Time To Buy More Shares