eSports: Micron Goes Ballistix

| About: Micron Technology (MU)


Revenues will reach $696M this year and rise to $1.5B by 2020.

eSports is a massive area of growth – the industry is expecting eSports to be more popular in terms of viewers than F1, NFL, and NHL combined by 2020.

DRAM revenues increased 20% on a sequential basis; my thoughts are that we can only expect this figure to increase as its Ballistix line continues its success and smartphone memory capacity soars.

Investment Thesis

Shining the spotlight towards eSports in the gaming world, it is not surprising to see that companies such as Advanced Micro Devices (NASDAQ: AMD) and Nvidia (NASDAQ: NVDA) are now releasing further products into the market to help people get started. Strong demand for graphics processing units (GPUs) has led to terrific growth in their video game business, thanks to the companies’ market dominance. However, according to Micron Technology (NASDAQ: MU), “Memory is a strategic differentiator”, and this could not be closer to the truth when it comes to PC gaming.

eSports Stimulus

(Source – Crucial)

To put in perspective how big eSports really is, a Google search for "lol" no longer produces "laughing out loud" as the top result. Instead, it returns League of Legends, one of the most popular competitive games in existence. To really grasp the size of the industry, note that the prize pool for the latest Dota 2 tournament is already ~$21 million and there is still a month left of crowd funding. eSports is not an opportunity to be missed – by 2020, it is predicted that the industry will be more popular in terms of viewers than F1, NFL, and NHL combined. Furthermore, it is estimated that global sales of gaming PCs will reach 8.7 million units in 2020, up 45% from 6 million units in 2015.

The momentum for PC gaming is growing, fast. Gamers spend more than double on their PCs than other consumers do, according to Gartner. To tap into this new stimulus, Micron has released a line of Ballistix DRAM which it claims delivers a higher level of performance than regular PC memory.

For more than 35 years, we’ve engineered old-school DDR memory all the way to Ballistix DDR4 modules, which empower the future of gaming performance. Backed by competitive warranties, a hardcore community of fans, and a dedicated gamer support team, Ballistix memory is ready to take your in-game performance to the next level.

Micron is clearly committed to the cause. But revenue wise, is this going to provide a significant stream to counteract the investors that seemed concerned regarding a possible cyclical slowdown in the memory business?

Estimating Revenue Growth

Goldman Sachs valued eSports at $500 million in 2016 and expects the market will grow at 22% annually compounded over the next three years into a more than $1 billion opportunity. Unfortunately, despite this looking like a good opportunity for Micron to thrive in, it seems like key players such as Kingston with their HyperX line have already put up strong competition posting a rather nice 200% sales growth. Gaming is not one of its core businesses, so it is important that there is a healthy gaming industry for it to continue its DRAM success.

Analysing the Q3 earnings report, DRAM products accounted for 64% of its total revenue during the quarter. DRAM revenues increased 20% on a sequential basis; my thoughts are that we can only expect this figure to rise as its Ballistix line continues its success and smartphone memory capacity soars. Micron reported better-than-expected Q3 2017 results, and I believe that the improving prices for DRAM and NAND chips will continue to stimulate investor confidence about Micron's growth. Along with Micron, many companies such as AMD and Nvidia say that they are experiencing higher-than-expected demand for PCs – this could be a by-product of the recent cryptocurrency spotlight, but personally I think this is a sign of the eSports vigor.

“Apart from the demand-supply imbalance, the demand for specialty DRAM is also raising prices. For example, Nvidia is using GDDR5X SGDRAM (double data rate type fiveX synchronous graphics DRAM) in its GPUs (graphics processing units).”

(Source- SEC Q3 Fiscal '17)

This is no surprise as we must simply remember that eSports does not just affect the memory market but also the GPU scene also.


(Source – SEC Q3 Fiscal '17)

As you will most likely know, the semiconductor industry is cyclical, so in that sense we can expect to see a repeat of previous company performance. Historically DRAM revenues have been much higher than the ones recently reported, so hence with a 20% increase in net sales Q2 vs. Q3 and a 106% QoQ gain, we can expect this to carry right through until the final quarter of fiscal '17. The eSports market is a huge gamble to take in terms of expecting a notable DRAM revenue increase. However, as seen in the case of Nintendo (OTCPK:NTDOY) and its latest console, the Nintendo Switch, companies and investors alike are wishing they had bought more and reaped the rewards. The console market is rapidly changing with trends and products often becoming redundant in just a matter of years, so perhaps eSports will be that one exception.

Recommendation – Buy

Current Price - $31.77

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