- Micron Technology looks set to soar to new highs on the back of improving end-market demand after posting a solid third quarter.
- Micron is focusing on product development to win more market share and sustain the high level of its performance.
- Micron is exploring new revenue opportunities such as 3D NAND and server DRAMs to boost its position in the industry.
- Micron's valuation and growth projections look fantastic, and the company should continue getting better.
Memory chip maker Micron Technology (NASDAQ:MU) released yet another solid quarterly report when it released its third-quarter results. The company saw strong pent-up demand for its products -- the DRAM and NAND chips -- as the personal computer market stabilized after declining nearly 10% in 2013. In addition, Micron is set to benefit from some more trends in the memory industry, which should help it continue appreciating after running up almost 50% this year.
Strong end-market prospects
Recent news from IDC should increase the confidence of Micron investors as PC shipments are expected to drop only 6% this year, a major improvement over last year's drop. Moreover, Micron remains bullish about the health of the overall memory market going forward, as it has observed a consolidated supplier base in DRAM, along with stabilization in NAND. Also, the industry is in a stage of maturity, and each supplier has sufficient scale to compete. In addition, a slowing rate of technology migration and supply bit growth trends that have now stabilized at a level below historical average have created long-term demand for its products.
On the other hand, applications requiring memory continue growing. Hence, Micron expects its products to remain in good demand to serve specific end-market needs and drive a higher level of efficiency and effectiveness. Also, the memory chip maker has expanded its business into diversified markets like enterprise, networking, mobile, automotive, and gaming to enhance its performance.
Product development to drive growth
Micron is investing aggressively in its test assembly and supply chain capabilities to support an expanding set of customer requirements. Micron is also focused on completing its 25-nanometer DRAM conversion, and bringing in the 20-nanometer DRAM ramp to enhance its cost position.
The memory chip maker is also concentrating on various growth drivers that are expected to drive its sales, such as the continued execution of its capital efficient 16-nanometer planar NAND conversion. It is also making strategic investments in tools and engineering resources to support the initial deployment and ramp of its innovative 3-D NAND technology to deliver higher value system level solutions to customers across the world.
3-D NAND is a fast-growing market and Micron is making the right move by investing in this area. According to a report:
"Analysts forecast the Global 3-D NAND Flash Memory market to grow at a CAGR of 180.7 percent over the period 2013-2018. 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 3-D NAND Flash Memory market has also been witnessing increased R&D spending by vendors."
Moving into new areas
Micron is also seeing accelerated demand for its server DRAM, which registered 30% quarterly growth in the third quarter, driven by data center and enterprise growth in density per unit memory content, leading to enhanced system level performance. Also, the memory chip maker has experienced healthy demand for its networking products, driven by the LTE build-out in China and in other emerging markets. Micron also sees improved pricing for networking DRAM on the back of a richer mix of products.
The company's graphics segment is also gaining momentum, particularly its GDDR5 product that saw strong sales in the third quarter on the back of key OEM penetration in both PC and gaming consoles. Also, Micron is driving innovation on the technology front with the recent releases of DDR4, DDR5, and Hybrid Memory Cube.
DDR4 is integrated to enhance the performance of server and desktop applications, while DDR5 is targeted at high-performance gaming PCs and workstation graphics. Meanwhile, Hybrid Memory Cube is meant for high-performance solutions in networking and computing. Micron has received a positive response from the market for these products, and expects them to grow at a healthy rate going forward.
Additionally, the memory chip maker has launched its first 16-nanometer client SSD drive, the MX100. This product is expected to boost performance and create value in the SSD segment for Micron. Besides, Micron anticipates solid OEM growth for its M510 and M550 client drives, as it has witnessed strong customer interest in terabyte-class client SSDs for immediate workflow, cloud, and other applications. Micron has also launched the M500 DC SATA enterprise drive for data center applications, and received a large volume commitment from a major search company to address their storage needs.
Moreover, Micron has done well in its mobile business. It has seen strong demand for its eMCP and eMMC mobile products for Tier 1 OEMs, while taking advantage of the more segmented opportunities in the Tier 2 market in China. Also, the company has decided to begin volume shipments for these products in the current quarter.
Micron expects that its eMCP and eMMC mobile products will scale significantly to approximately 25% of the overall mobile revenue in fiscal year 2015, as compared to less than 10% today. The company has also started sampling low-power DDR4 to its partners and chipset vendors. It expects to begin shipments for this low-power product in the second-half of fiscal 2015.
Terrific fundamentals and growth projections
Hence, Micron is expected to do well on several fronts. But what makes the stock even more enticing is its cheap valuation and the expectation of rapid earnings growth. Micron currently trades at a forward P/E multiple of 9.19 as compared to a trailing P/E multiple of 12.73, which indicates that the company's earnings are expected to grow going forward.
Also, its PEG ratio of 0.50 indicates undervaluation. Besides, it has considerably strong operating and profit margins of 18.34% and 24.06%, respectively. Its return on equity is impressive as well at 38.86%. Moreover, analysts have projected an annual earnings growth rate of 19.63% for the next five years, higher than the average industry CAGR of 15.72%, reflecting better growth prospects of Micron. Hence, all in all, Micron looks like a solid bet and there's a solid chance that it will continue appreciating after earnings.