Flash memory company Micron Technology (NASDAQ:MU) is on a terrific run in 2014. The company's shares are up almost 35% as Micron has posted a couple of fantastic quarterly results. In fact, in the last two quarters, Micron has beaten the Street's earnings estimates by an average of 45%, and the stock now trades at 52-week highs. There is a solid probability that Micron will continue rising in the future as it has a number of solid catalysts in store, such as the upcoming Apple (NASDAQ:AAPL) iPhone and strong demand from other customers.
Positive industry trends
Micron is focusing on delivering operational excellence by providing differentiated and system level products to diverse market segments and manage capital allocation, all with the goal of maximizing long-term shareholder returns.
There's a favorable outlook in the memory industry as well. The current industry structure is believed to have fundamentally changed, allowing Micron to manage its business focused on return-based capital and supply decisions.
For example, the DRAM industry wafer production is expected to be down in the mid-single digits in 2014 as a result of DRAM to NAND conversions, and the ongoing increase in process complexity with shrinking geometry. Total industry bit supply growth is believed to be in the low to mid 20% range for 2014. Beyond 2014, a similar year-over-year industry supply growth in the range of 20% to 30% is expected, driven by relatively stable wafer output coupled with slowing process technology migrations compared to historical trends.
The five-year DRAM demand CAGR is expected to be in the mid 20% to 30% range, which implies continued favorable market conditions and likely a reduction in volatility as compared to historical DRAM trends. For NAND, industry growth is projected in the low 40% range for 2014. 2015 is expected to be in a similar range. The five-year NAND demand CAGR is projected to be in the high 30% to low 40% range, giving rise to favorable conditions.
Product development and strong growth
Micron is very bullish about the future of NAND flash and believes it to be a very healthy market. There are strong demand drivers and elasticity to drive rebalancing in the industry. Micron's NAND process technology positioning remains strong, and the company is ramping yields of its 20 nanometer and industry leading 16 nanometer technologies.
Micron's product team has also delivered some exciting new products and innovations to customers, including the PCIe SSD solution. Further, it remains focused on optimizing value for shareholders and worldwide customers in 2014 and beyond.
The DRAM business of Micron expected to deliver strong results with stable revenue and strong gross margin expansion. It is recording strong bit shipments in DRAM specialty markets, including the server, the consumer, and the graphic segments.
The server business of Micron achieved 68% year-over-year bit growth in the second quarter. It is providing its key server customers with unique solutions to help differentiate their products, such as hybrid memory computing (NYSE:HMC) enablement. Micron has also achieved DDR4 validation at key chipset partners and is beginning to ramp volume production. Micron continues to see strong growth in the public cloud market, indicating a three-year DRAM bit demand CAGR of 76%. So, the company has a lot of opportunity to continue ramping up its business.
In the networking business, Micron is seeing attractive returns with its capacity yields. Its strong position in networking applications is a result of its technology leading solutions and excellent customer relationships. HMC enablement with major networking customers is resulting in higher bandwidth performance. Moreover, DDR4 enablement with its key chipset partners will drive further differentiation for its network solutions. In addition, catalysts such as the LTE roll out in China and continued cloud and datacenter growth indicates a healthy demand outlook for Micron going forward.
Also, the company is shifting its overall NAND production to its industry leading 16 nanometer technology, which is shipping in consumer products such as memory cards, USB storage devices, and embedded consumer products. These transitions in manufacturing output will help Micron create a lower cost product mix in the future.
The 3D NAND opportunity
Moreover, Micron expects the 3D NAND technology, aimed at higher performance applications, to become its next bog growth driver. The company is targeting volume production for fiscal 2015. This is a smart move by Micron. According to an industry report:
"The analysts forecast the Global 3D NAND Flash Memory market to grow at a CAGR of 180% to 2018. One of the key factors contributing to this market growth is the increase in memory requirements and demand for low form factor NAND flash memory. The Global 3D NAND Flash Memory market has also been witnessing increased R&D spending by vendors."
Apple will be another driver
Apart from these positive prospects, Micron is also positioned to benefit from Apple's next iPhone. After acquiring Elpida last year, Micron bought its way into Apple, to whom Elpida supplied memory chips for iDevices. This year, it is expected that Apple will be manufacturing 80 million units of the iPhone 6. According to an International Business Times article:
"Numerous analysts had been pinning for iPhone 6 to be the chief catalyst to propel Apple Inc stock saying that a larger screen display will help the company snatch customers away from rival Samsung.
Apple Inc. iPhone 6, 4.7 inch large screen, is coming in August as reported by Reuters.
Citing Taiwanese news portal, the Economic Daily News, Reuters said unnamed sources from Apple supply chains leaked the information.
Based on supply chains estimate, Apple Inc is seen to be shipping a total of 80 million units for 2014."
So, Micron is in a solid position to profit from the upcoming iPhone, and the company should see an increase in demand for its memory chips going forward.
Fundamentals and conclusion
Micron is still quite cheap. Its trailing P/E and forward P/E ratios of 11.55 and 9.37, respectively, indicate solid earnings growth in the future. In addition, a PEG ratio of just 0.73 depicts undervaluation. The valuation is quite enticing, considering an expected earnings growth rate of 13% for the next 5 years. So, despite a solid performance this year, Micron is still a good buy.
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.