Micron Technology: Still Going Strong

Jul.31.14 | About: Micron Technology (MU)

Summary

Micron Technology's positive performance is expected to continue in the future.

The Elpida acquisition is already delivering and should continue to be fruitful in the future.

Micron Technology is well-positioned to improve its margins by taking advantage of the demand and supply gap.

Micron Technology (NASDAQ:MU) has been a boon for investors in the past one year. The stock prices have soared up over 155% in the last one year and approximately 48% this year, outperforming the 8% growth of the S&P 500. Micron Technology's positive earnings surprise in the past and strong fundamentals have helped the memory chipmaker's performance.

Does the company have the potential to carry on its stellar performance in the future too? Let's find out.

Micron Technology's stock price surge has been well-complemented by an impressive growth in the top line, which has increased 72% third quarter compared to the same quarter in the last year. The bottom line too surged 10%, as the company has enjoyed high margins along with increasing revenue.

Going Forward

Micron, post its acquisition of Elpida, has become the fourth-best company in chip making, if we compare on the basis of sales growth. Elpida has been a major supplier of mobile memory chips for Apple, which has contributed to Micron's increasing revenue. Further, Apple's growth in its desktop, laptop and upcoming iPhone 6 should encourage the demand for Micron's DRAM.

The company's innovations in DRAM, NAND and Flash memory, along with its customized solutions for various mobile and computer companies which are looking to enhance performance and reduce size should benefit it in the long run.

Apart from the increase in company's own strength, the surge in the demand for DRAM and NAND memory chips should also benefit it in the future. The company expects the demand for DRAM and NAND to rise in the mid 20% to 30% and high 30% to low 40% ranges, respectively, over the long term.

Margins should improve

Recently, there has been a huge gap in demand and supply in the DRAM market. Samsung's manufacturing capacity suffered, as it was migrating the production of 20,000 wafer starts for DRAM chips to 25nm process. Further, SK Hynix's production capacity was also affected, as its memory chip plant in Wuxi, China was damaged by fire. Both the companies will improve their production capacity eventually, but till then, Micron can easily enjoy higher margins by increasing its price.

Another reason to believe that Micron can improve its margins is that its 34% gross margin is still far behind other players of the industry, such as Samsung (OTC:SSNLF) and SanDisk (SNDK). Though the company generates a gross margin in the high 30% range in the DRAM segment, in NAND, it generates a margin in the high 20% range.

It is noteworthy that SanDisk, which only produces NAND products, generated a 51% gross margin in its last quarter, which means there is lot of scope to increase margins from its NAND products for Micron. Nearly two-fifths of SanDisk's production is triple-level cell (TLC) NAND, which is in as much demand as Micron's NAND chips and costs 20% less, thus boosting SanDisk's margins. Micron's top management too has realized the mistake of not focusing on TLC earlier and has taken steps to improve it.

The company is restructuring itself to tackle the concerns in its NAND business, and Durcan believes that the expected improvements should start delivering by next year. Moreover, Micron's SSD product launch, which is in immense demand over the traditional hard drives, should also add to both the top line and bottom line of the company.

Takeaway
Micron Technology's performance has been spectacular so far this year. The company is all set to advantage itself from the overall growth in the memory market. Further, the company is well-positioned to improve its margins by taking advantage of the demand and supply gap. The addition of clients like Apple, post the acquisition of Elpida and Intel, in its kitty should add stability to its revenue in the long run. At a forward P/E of 10 times, Micron is a safe bet with all the future prospects visible.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.