Micron Technology (NASDAQ:MU), the manufacturer and seller of DRAM, NAND flash and NOR flash memory has brought fortune to its investors. Micron is performing impressively and as a result analysts upgraded the stock to a buy rating. Micron is the second largest producer of dynamic random access memory "DRAM" and had a tremendous second quarter since its results were above analysts' expectations. Analysts' were expecting $3.98 billion in revenues whereas Micron generated $4.11 billion in revenues that were 2% higher than the first quarter of 2014. The company also experienced an off the chart 98% increase from the second quarter of 2013.
During the second quarter DRAM revenues generated 68% of total revenues and remained unchanged on a quarter-over-quarter basis. These flat revenues were due to stable sales volume and average selling price and in addition the cost of DRAM declined 8%. However Micron may be concerned with future sales of DRAM due to the declining PC demand worldwide. The NAND flash memory is clearly the growth contributor and its revenue improved 11% in the second quarter compared to the first quarter of 2014 primarily due to a massive 35% increase in the sales volume. However, Micron was not able to fully benefit from the volume growth due to an 18% decline in the average selling price. NAND flash memory is primarily used in smartphones and tablets. The massive demand of these devices has put Micron in prime position to see strong NAND product sales. This is an ideal market condition for Micron to increase its earnings growth pace at a higher level.
Micron's Improved Profit Margins Helped the Healthy Earnings
The revenues and overall gross margins improved during the quarter. The gross margins of NAND products were roughly above 20% reflecting a decline of five percentage points sequentially due to a drop in the average selling price which occurred due to seasonal effects. On the other hand, the gross margins for DRAM products were around 30% reflecting an improvement of five percentage points. Overall, Micron's gross margins were 34% reflecting an increase of two percentage points.
Micron's earnings boosted significantly on the back of strong revenues and improved margins. On a GAAP basis Micron's net income increased to $731 million or $0.61 per diluted share compared to the net income of $358 million or $0.30 per diluted share in the first quarter of fiscal year 2014 and a net loss of $286 million or $0.28 per diluted share in the second quarter of fiscal 2013. On a non-GAAP basis the net income increased to $989 million or $0.85 per diluted share compared to the net income of $881 million or $0.77 per diluted share in the first quarter of fiscal year 2014.
DRAM is Key for Growth
DRAM is key to Micron's growth, if not for the long-term but for the mid-term. Much of Micron's earnings proportion and growth is dependent on the DRAM. The DRAM market supply and demand is likely to remain quite stable this year so considering this factor Micron's sales revenue for the next few quarters is on the average selling price trend and cost per bit trend. Micron expects the total industry bit supply growth to be in the low to mid 20% range for 2014. The company has forecasted a five-year DRAM demand CAGR in the mid 20% to 30% range which implies continued favorable market conditions and a likely reduction in volatility compared to historical DRAM trends.
NAND and SSD Are the Next Big Opportunities
The innovation in NAND flash and growth potential in 3D NAND flash has urged Micron to transit from planar NAND flash to 3D NAND flash with volume production targeted for fiscal year 2015. 3D NAND is expected to experience a major shift and will account for the majority of total flash shipments equivalent to 65.7% by 2017.
Samsung Electronics jumped into the 3D NAND market when the company launched 3D V-NAND storage technology in the form of a 24-layer 128GB chip last year. SanDisk (SNDK), which has a joint venture with Toshiba in developing NAND technology, has its own 3D-NAND flash technology, known as p-BiCS and will also be looking to have a major impact on the industry. The competition in 3D NAND flash is getting heated but this market is still in its early age and because of this Micron will be able to grab its market share. How significant that share will be will be determined in a matter of time.
Apart from DRAM enterprise solid state drives (SSDs) are an important strategic initiative to boost the company's growth. NAND bits sold under Micron-branded SSDs rose 23% in the fourth quarter of 2013 primarily driven by growth in the enterprise space. The Micron-branded SSD revenue for fiscal year 2013 was up 76% year-over-year and over 50% of the trade NAND revenue went to either Micron-branded SSDs or to the strategic customers who serve the SSD category with Micron's NAND technology. Micron shipped its first 20 nanometer enterprise drive, the M500 DC, to large OEMs in the quarter.
Additionally Micron also revealed plans to begin production of a 60 nanometer client drive in the third quarter of fiscal year 2014. The SSD market is quite strong because SSD shipment increased 82% in 2013 while in comparison hard drive shipment declined 7% year-over-year. The shipment growth will continue but will slowdown in the next few years. SSD shipments will grow 50% in 2014 and are expected to reach 189.6 million units in 2017. There is enough growth potential for Micron to benefit from the market through advancement in SSD technology making SSDs more usable for a broader set of applications and market segments.
Since the start of January 2013 the stock price has increased to around 296%. Micron's total return of 178.6% over the last twelve months has greatly outperformed the S&P 500 total return of 20.43%, Rambus' (NASDAQ:RMBS) total return of 71.48% and SanDisk's total return of 63.87%. Micron's valuation is very favorable for one who wishes to make an entry. The stock is trading at a forward P/E of 8.64X while in comparison SanDisk is trading at a forward P/E 13.32X and Rambus is trading at a forward P/E of 24.20X.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.