DRAM prices are in a free fall. However, the release of Windows 8 can reverse this decline and benefit Micron Technology (MU). MU's extremely significant purchase of Elpida Memory makes it the second largest manufacturer of DRAM in the world, and also gives it access to Elpida's Mobile DRAM technology. Micron's NAND business has seen significant growth during the last year and has contributed more than 50% to Micron's revenues during the second half of 2011. SSD is a disk for the future considering the focus on reducing device weight and size. We expect a positive outlook in the mobile DRAM and NAND markets in 2013. Moreover, we expect DRAM prices to rally on the release of the Windows 8. Therefore, we have a buy rating on MU. The following are key catalysts for MU:
- Success of Windows 8 release and PC sales growth
- Successful reduction in per gigabyte cost
Micron Technology has emerged as major power in the semiconductor industry after its recent acquisition of Elpida Memory. Micron agreed to buy the bankrupt Japanese semiconductor giant for $2.5 billion; a huge discount purchase. Elpida will function as a subsidiary of Micron once the deal is finalized in the first quarter of 2013. Elpida was a major chip supplier to Apple (AAPL), and the purchase means that Micron will be a key supplier of Apple. Companies such as Nokia (NOK), Microsoft (MSFT) and HTC are all potential customers for Elpida products, which was the leader in low-power Mobile DRAM products. The U.S.-based company continued its buying spree; purchasing 24% Rexchip shares from Powerchip Technology Corp. (also a DRAM manufacturer) for $324.4 million. Micron now owns an 89% stake in Rexchip. These acquisitions have established Micron as the second largest DRAM manufacturer, just behind Samsung. The company now controls a market share of approximately 24.8%, almost twice its pre-acquisition market share.
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Figure 1: Five-year Performance Y-Charts
The company currently has a market cap of $6.41 billion, trading in a 52-week range of $3.97-$9.16. As the figure shows, high fluctuation in the stock price over the last few years has resulted in a high beta of 1.86. 2011 was the company's best year, both in terms of income and revenues.
The company posted mixed results for Q3 2012. It beat revenue estimates by posting revenues of $2.17 billion; up 3% from the previous quarter. The market was expecting revenues of $2 billion. However, it missed analyst estimates of a loss of $0.20 and posted a $0.32 loss for the quarter. The increased loss can largely be attributed to reduced gross margins in the DRAM Industry. There has been a steady decline in PC sales due to increased popularity of media tablets. This has been one of the primary factors behind declining prices of DRAM products. This slow demand has increased inventories for OEM (Original Equipment Manufacturers). OEMs, who usually keep DRAM inventories of four to six weeks, have two to three months of inventories. Attempts to slash prices have not been able to recover demand. 4 GB DDR-3 prices have fallen almost 5% from July prices; now trading at $18.5-$18.75. These diminishing gross margins are forcing the DRAM Industry to consolidate. Last quarter, the only DRAM manufacturers who posted profits were Hynix and Samsung.
Figure 2: Company Disclosed Decrease in Average DRAM prices YoY
Figure 2 shows the significant decrease in prices of DRAM products in the last few years.
Micron has diversified into other products in the last few years. The company used to rely mostly on its DRAM (Dynamic Random Access Memory) products for its revenue stream. In 2011, for the first time, DRAM sales accounted for less than half of the company's revenues. Table 3 gives us revenues generated by each of the company's different product lines. If we look at the sales of different DRAM products, we can see a steady decrease in DDR 2, as DDR 3 takes its market share. DDR 2 and DDR 3 are mostly used in computers and servers. The LPDRM are special RAM products for handheld devices and notebooks; devices that require low power consumption. All these categories of DRAM products are showing a decrease in revenues as compared to their 2010 figures, coming as a result oflower demand. The NAND (Flash Memory) products are electrically re-writeable, non-volatile semiconductor memory devices, which are used to store data. Over the last few years, Micron has tried to diversify its business by focusing on NAND products. NAND has also been affected in 2011, decreasing 2% from 2010 sales.
Table 3: Historical Segment Performance
NOR are re-writeable, non-volatile semiconductor memory devices that enable direct process access without the need to access RAMs first, and can be used to store codes in wireless devices. Micron acquired Numonyx in 2010, which manufactures NOR and has seen a significant growth of approximately 350% YoY.
Segment performance as % of Revenue
Source: Qineqt's Database.
There has not been a lot of fluctuation in analyst opinion regarding Micron. Considering the opinion of 28 analysts, 23 have either a buy or strong buy position on the stock. None of the 28 has a sell or underperform rating for MU stock. Five analysts have a hold rating on the stock, most likely due to uncertainty concerning PC sales in 2012 and 2013.
Source: Yahoo Finance.
The stock is currently trading at a forward PE of 30x and P/S of 0.76x. The industry P/E is currently 68x. The historical high P/E for MU is 34x. Considering the recent acquisition of Elpida, we believe that Micron will have a more diversified portfolio of products and therefore steadier revenues. We expect that the DRAM Industry will rally on the Windows 8 launch. We also expect an increase in tablet and mobile DRAM prices in 2013 due to launches of the iPhone 5, new Lumia handsets, the BB10 and the Microsoft Surface tablet. The current high P/E is due to depressed earnings. Therefore, we will use the Nasdaq's P/E of 15x and Micron's five-year average P/E of 17x.
Price Target (15x)
Price Target (17x)
Conclusion: Bullish Thesis
The DRAM Industry has slowed down due to a slowdown in PC sales, combined with anticipation of the Windows 8 launch. We believe that DRAM prices will rally on the Windows 8 release. The acquisition of Elpida has been a major milestone for Micron. MU has not only bought Elpida on a significant discount, but has also significantly diversified its product portfolio. The mobile DRAM and SSD (Solid State Drive) are expected to have high demands in 2013. Along with major players like Microsoft, Samsung, and Apple, there are dozens of other generic tablet makers in the market, most of them Chinese which will help MU to grow sales.
The highly competitive semiconductor industry is focused on cost reduction. Price-based competition makes it almost impossible for inefficient companies to survive. Cost control has always been a key area of concern for Micron. The purchase of Elpida should increase Micron's economies of scale. If the company does not control its costs, it will continue to post losses despite healthy sales. Another risk for Micron is the possibility of another DRAM manufacturer coming up with a superior product before Micron.