Micron (NASDAQ:MU) saw a bit of a pop this week with shares surging nearly 10%, based off of SK Hynix's (OTC:HXSCL) earnings call. The two most important questions Micron investors need to be asking themselves right now are: (1) what the information that Hynix released actually means, and (2) whether this information justifies a rise in Micron shares.
First, a basic overview: Hynix is one of Micron's main competitors for both DRAM and NAND (two different types of memory). As most investors are probably aware, Micron's two biggest business segments are DRAM (64%) and NAND (33%). For DRAM, Hynix is one of two major competitors of Micron, with the other competitor being Samsung (OTC:SSNLF). Currently, memory (particularly DRAM) is very oversupplied, which is especially problematic for Micron, given that they have the highest cost structure.
Back to the earnings call - for one, Hynix indicated that they expect DRAM and NAND shipments to grow by roughly 15% and 30%, respectively in Q2, but still expect ASPs to decrease, although not as severely as they have been previously (14% Q/Q for Hynix). For the full year, they are actually projecting mid 20% growth for DRAM and mid to high 30% growth for NAND. This would seem to be a clear positive for Micron - Hynix is projecting this as a secular trend that they benefit from, with Morgan Stanley (NYSE:MS) even noting that their growth rate is "below the market's growth rate." However, the problem is that Micron already stated in their earnings call, a month ago, that they are anticipating DRAM growth of low to mid 20. Therefore, the demand picture improving in 2016 was a known factor - not enough to justify a 10% rise in the stock price.
Moreover, Hynix indicated that mobile and server DRAM would largely drive the improvements for DRAM. PC DRAM is still faring poorly, and that's a bigger business for Micron right now than mobile DRAM. There is also additional risk on the supply slide for NAND, as Hynix plans to start ramping up their 3D NAND production in the second half of the year. NAND has actually been fairly balanced supply/demand wise so far, so this might pose a problem for Micron's other business segment. A slight mitigant is that Hynix is aware of the worry over supply/demand balance for memory, given the drastic drop in prices over the past year, so they are likely to be cautious.
It's not all neutral to negative for Micron though. A fairly key factor that Hynix mentioned that is actually likely to be a positive for Micron is that they're expecting capex to go down from 2015. Moreover, a lot of this capex is likely to be associated with the aforementioned 3D NAND, rather than DRAM. The expectation going into Hynix's earnings call was that capex would match that of last year, which might have had a negative affect on supply. Therefore, the real question from this is whether it alone is enough to justify Micron's rise - given that many headlines talked about both the shipment growth and capex slowdown as the reasoning for why Micron was rising, (with the former being given more emphasis) I do not think it does.
It's also very critical to note that Samsung is much bigger than both Hynix and Micron, and has the lowest cost structure for DRAM. Their plans are a much bigger factor for the overall DRAM supply and ASP, than either of the other two companies. Samsung also released earnings recently though, and this did have some good news for Micron. They stated that they are planning to focus on "sustaining solid profitability" for DRAM. This is a lot easier for them than Hynix and Micron though, given that their costs are lower. The capex news is a bit more iffy, with Samsung planning to keep their DRAM capex flexible, but "generally lower than 2015." Lastly, they are also projecting increased mobile DRAM growth, and interestingly enough, a partial PC DRAM recovery.
Overall though, Hynix and Samsung's earnings seem to bode well for Micron, enough to keep me cautiously optimistic on the company, even if it didn't justify the big rise in share price earlier this week. Micron itself also has a fairly favorable valuation, trading at just about book value, and it is working to lower its costs for DRAM production in 2016, and it has a strong cash position. Not to mention that 3D Xpoint's commercial potential hasn't even been begun to be tapped yet. Any big gains will have to wait until 2017 though, but I don't expect any more big drops for Micron, at its current share price. Therefore, investors should look into buying or adding some more should Micron's shares fall into the $10- $11 a share range once again.
Disclosure: I am/we are long MU.
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.