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Micron: The New Paradigm Unfolds

Jun. 08, 2020 8:27 PM ETMicron Technology, Inc. (MU)400 Comments
Sunil Shah profile picture
Sunil Shah


  • As many companies disown or halve earnings projections due to COVID, Micron shows its pedigree by raising guidance and reiterating an improving future.
  • One factor is company-specific: the remarkable diversification in Micron’s supply chains that enabled production to be reconfigured in the face of country lockdowns and specific bottlenecks.
  • The second factor is a new secular tailwind: a rise in Home/Office computing that’s led to a surge in digital memory for the offsite employee. Plus, 5G mega-memory smartphones!
  • A perennial investor fear has been inventory obsolescence. The article substantiates why changing industry dynamics necessitate larger inventories and why this is no longer a precursor to a bust.
  • An invaluable insight was articulated by the CEO only last week, on why the ’18/’19 volatility in DRAM ASPs is highly unlikely, via a new maturity in data center mindsets.

Micron (NASDAQ:MU) has just shown its excellence: where most companies are busy disowning forecasts or halving them, Micron actually raises for the next quarter and states visibility through COVID is improving. The revision was articulated at the Bernstein Conference by CEO Sanjay Mehrotra only last week. Valuable insights were divulged and are detailed here, but I urge readers to listen to the presentation also.

Before I address insights revealed at the conference, it will be helpful to outline the evolution of the digital memory industry.

The Emergence of an Oligopoly

This section summarises two decades of a dynamic landscape. I have covered the history in more detail in a previous article; please refer to Micron: Fear Of Inventory Impairment Fueled By Trade Spat Is An Opportunity for a deeper analysis.

Two decades (1997-2017) depict an industry rife with innovation and a vicious struggle for survival by numerous suppliers, each vying to secure a place in the future. No doubt, the stellar growth in demand of both NAND and DRAM portended rich harvests for survivors of the digital gunfight. However, the cost to play was a big R&D budget to remain "technologically current" in an industry evolving at a frenetic pace.

Quantum leaps in all aspects of memory design and manufacturing permitted massive cost improvements every year… the rate of technological progress was so rapid that if a supplier couldn't get its inventory out the door in a given quarter, it was virtually worthless in the next, because some other supplier that had kept pace with the digital beat offered a superior product at a lower price. As a result, the pace of innovation rendered inventory obsolete in a matter of weeks if it wasn't sold, leading to a dramatic culling and 'survival of the fittest.'

Natural selection was vicious; few survived. For

This article was written by

Sunil Shah profile picture
A fund manager who cut his cloth in Schroders London. He joined Coronation South Africa in 1998, running the Smaller Companies Fund which had the best 5-yr record in the sector during his tenure. In 2005 he left Coronation to pursue his passion in writing (and invest without constraints). He recently completed his first novel, a financial thriller called "White Man's Numbers" see www.whitemansnumbers.com - highly acclaimed rollercoaster! See excerpt and reviews on website link.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (400)

bubbleking profile picture
If you thought Aspeed's May 85.72% YoY change was good, check out June's 92.15%. New record month (by a mile)
i_am_seeker_2 profile picture
Geez, maybe we should be buying Aspeed!
@bubbleking Is it possible to quantify just how bad this is for MU?
Stephen Breezy Research profile picture
@Randall A. Dass

This is good for MU - not bad. Aspeed just takes commodity DRAM (from all manufacturers) and assembles modules for consumption. The fact that they are selling so many means that the DRAM industry is alive and kicking.

Work from home is the impetus here. People need to abandon their desktop PC at work in order to buy a laptop.
Sunil Shah profile picture
'Micron did not loose money in the last down cycle. '

if you were more diligent (with your imitation - see below),
you would have seen it's 'lose' not 'loose'

anyway hope that helps, not hurts

I was looking up 'maximum pain' wrt Micron options, you had some comments. FWIW my intuition's saying it's currently the tail wagging the dog...

Any comments you have for Micron's bizarre price action in the last few days, from options and max pain?

thanks in advance
S_Archer profile picture
Talked to a couple investors we work with on Micron Price. All analysts are bullish... investors not so much.

Their comments (FWIW):
The age old micron paradox: "if its good now, it will be bad later" Prices went up significantly. its too good so we should sell now"

Spot prices dropped significantly between mar and june . Contract and Micron prices follow spot on a delay (where is phred with the graph?). Prices will drop 5%+ in Q3 (seems unlikely since Micron knows pricing and gave guidance)

Inventory rose again... it should not be rising now.

All of the trade possibilities are bad. either micron cant sell to someone or US wont buy from someone micron sells to.

Micron is based in Idaho. Congress is voting to declare Idaho an Alt-right Fascist organization and outlaw all companies located there. Google and Facebook will delete all links to the company

[I made up the last part... that won't happen til Jan 3rd 2021, so we got a few months]
bubbleking profile picture
It's amazing to me that $5.4B of inventory only lasts 131 days. $41.2M per day. Wow.

Micron should break-out the extra value of raw material they are holding over normal levels due to the pandemic. Is that more than $200M in Q3?

Here are the FQ2 and FQ3 statements on inventory.

"Ending FQ2 inventory was $5.2 billion or 134 days. The increase was expected and largely due to the seasonally weaker demand experienced in FQ2 combined with our strategy of holding more NAND inventory as we approach our transition to replacement gate later in the calendar year."

"Ending FQ3 inventory was $5.4 billion or 131 days versus 134 days last quarter. Our overall days of inventory are above our approximately 110-day target level, partly due to elevated NAND inventory as we transition to replacement gate. We are also carrying higher raw material levels as a precaution, given the increased supply chain uncertainty due to the pandemic."
The inventory build up in raw materials is what caused the inventory to go up by .2 billion. The finished goods inventory is 3 days smaller than the last quarter. Raw materials generally do not become obsolete as fast as finished goods. On the other hand Inventory is defined as "something nobody wants"
Sunil Shah profile picture
@kimbillro @Scott the Robot @Retired One @linklinklink
I'm adding a sketch of our 3 Giants Markson, Samson and HiJinx playing poker in a cosy cartel.

So does this parody sketch sound vaguely authentic:
Any Big Blunders? Please tell me.

From article in SA Pending Box (for 4 hours, untouched!)

Digression: The Digital Giants’ Poker Game

It’s approaching midnight. The wannabes have all been cleaned out. Pockets empty, smiles even emptier, the only ones left behind are the three seasoned veteran wolves.

Markson ($MU) stands up and deals. He yawns loudly, looking at his wristwatch for greater effect.

For two rounds, chips leave their owners’ stacks and gather in the middle.

Markson's turn. He swirls his chip expertly between his fingers but then puts it down instead. He looks directly at the other two.

“If you raise, I match you Samson ($SNLF) or you HiJinx... so why raise at all! When we all have our cigars, a tidy gain... basically we cleaned them upstarts with their probability crap right out!“

“Whaddamoredawewant?” Samson agrees. “Let's get some Rib-eye while we're all ahead. Right?”

“Hell yay” says HiJinx ($HYNX), gathering his loot.

They all start packing up.
I'll let you know @Sunil Shah . I may go to a Nevada casino this Friday. Must wear a mask.
Sunil Shah profile picture
you dont need to go to Vegas.
Does the action resemble a poker game...?
or are you as clueness as I here....
I don't think a poker player can fault you on your scenario @Sunil Shah . I can't. I bet on NFL football mostly. I try to figure out the fix and go with the fix. I bet NFL futures on next years Super Bowl and things like that. During the football season I bet parlays and teaser parlays.
Sunil Shah profile picture
@Scott the Robot
'@Sunil Shah I've been following you since 2018. You're just like me in that you see the value of MU - your logic is sound and you have a firm grasp of MU's financials and you have reasonable projections for future revenue and earnings. However, maybe its time we both realized the market just doesn't see things the way we do.'
Sunil Shah profile picture
I don't have to add that was a joke, from sheer frustration
Or do I?
I thought you were serious @Sunil Shah . Thanks for correcting your first comment with a second explanatory comment.
Sunil Shah profile picture
in this crazy world, one never knows
Sunil Shah profile picture
OK just submitted a frenetic article describing why $100

The two insights covered here virtually secure a $100 share target. The only question is how long Mr Market takes to digest this: 12 weeks or 12 months. But digest this it shall.
Bass12 profile picture
Here are some brand new analyst PT's from this morning:

Piper Sandler: Neutral, $48 --> $51
Raymond James: Strong Buy, $60 --> $65
Morgan Stanley: Overweight, $63 (unchanged PT)
BMO: Market Perform, $49 --> $55
BofA: Buy, $70
Citi: Sell, $35 (1.1x book value)

Can't help but chuckle at Citi's report. Absolutely shameless. Christopher Danely has been absolutely dead wrong on the company's fundamental performance AND stock price moves for about two years in a row running now.
Sunil Shah profile picture
i really hate these words:

Hope you and @Retired One and @kimbillro are on the right side of this.
I couldnt help start scribbling another article, given how well I've read this baby.
"Micron: The Paradigm Unfolds Further: $100 A Visible Target "

As many companies disown earnings projections ravaged by Covid, Micron shows its pedigree by raising guidance and reiterating an improving future.

Four weeks after material insights provided at a conference the CEO augments a promising future in the 3Q F20 (May) conference call.
This article is a short but essential extension of a detailed buy recommendation published last month, focusing on two significant points.
After a 3-year phase of material Capex investment in new capacity, Micron eases into lower phase of lower capital budgets. The operating cashflow thus liberated is spellbinding; Mr Market hasn’t yet digested Micron’s capacity to increase sharebuybacks. and
One investor specific investor concern is Micron’s exposure to the political 5G football called Huawei. Micron has skillfully pivoted away from Huawei without losing sales momentum.

The above insights, one on the cash spigot, and the other a diversification of political risk, secure a $100 target. The only question is how long Mr Market takes to digest the data: 12 weeks or 12 months. But digest it will. Buy!

Looking forward to your new article @Sunil Shah . Have a good day.
linklinklink profile picture
This is the typical jump before the drop. Watch what happens at market open this morning when it falls away from $52
Sunil Shah profile picture
i disagree due to the phenomenal jump in earnings and confidence
i hope over 60 by end of week
lets see....
linklinklink profile picture
@Sunil Shah

How many times have we seen the same jump AH on earnings, followed by a complete collapse the next day?

You have personally witnessed at least 5.

AH doesn't reflect the market. Let's see what happens at 9:30. I'm guessing there will be a lot of profit taking.
Sunil Shah profile picture
'How many times have we seen the same jump AH on earnings, followed by a complete collapse the next day?'

You have my guarantee
Sunil Shah profile picture
@S_Archer comment:
'FCF was near zero this Q right?'

Right. 2bn op cash flow= Capex.for the qtr.
But fiscal annual Capex forecast to be - 40% yoy for f20.
So about $5-6bn.
And op cash flow about $10bn in f20 and Imo +14bn $ in f21 if ASP s continue to rise.

That spits out $9-10bn of post Capex cash flow in f21.
OR MU marketcap/free cashflow of 5X for f21 currently!!

This leads to my target price = $100/share as visibility of F21 crystallises.

NB: Management are always cautious to be bound by a Capex figure, thence permitting leeway if misconduct by other oligoplolists.

Markson Continues,
'If you raise I match you Samson or hiJinx, so why raise when we all have cigars a good final hand and a healthy night of poker winnings! Whadayyawant?Let's get some Rib-eye while we're all ahead. Right? Hell yay'

They all start packing up.

But the cash spewing nature of MU biz combined with drastic reduction in f21 capex is spellbinding, IMO
I would be v surprised if $60 / share is not breached by the end of week.
BY FAR THE CHEAPEST DIGITAL MEMORY COMPANY in S&P, yet offering a powerful revenue-accretive gamme of product

Go Micron!
Sunil Shah profile picture
to underscore the capex dynamic, in the last few years capex /fiscal year has hovered around a large $8bn.

However f20 will be down to $6bn

Pre-covid MU expected to invest more in f21 BACK TO $8BN NORM
However post covid f21 capex is CURRENTLY forecast to be down meaningfully, giving the extra fire-power for share repurchases.

from Bernstein CC, in May 2020

"And, in fact, in fiscal year '20, our CapEx is down by more than 40% for equipment spends. So, our CapEx strategy is to focus on supply growth CAGR to be in line with demand CAGR expectations. And we remain extremely focused on making sure that we're managing our CapEx, we're managing our supply growth carefully to make sure that our supply and demand are in balance and we're extremely focused on ROI as well.

So, pre-COVID, we were expecting that our fiscal year '21 CapEx would be higher than fiscal year '20. Again note that fiscal year '20 was meaningfully lower than fiscal year '19. But, as we encountered the COVID situation, we have made adjustments to our plans. And our CapEx expectations at this point are lower -- for fiscal year '21 are lower than our CapEx expectations pre-COVID. So, you can see that we are continuing to review this, continuing to make adjustment. We'll continue to monitor this over the course of next few months as well. And, of course, as we get closer to talking about fiscal year '21, we’ll provide you further specifics related to CapEx."
Sunil Shah profile picture
zisner just said capex down 40 % yoy

shares will be repurchased like water....
look out for next approval for further share purchases
Bass12 profile picture
@Sunil Shah let's get through the ~$8 billion remaining in the current program before we start thinking about the next plan
S_Archer profile picture
share count never really dropped much. they give them away as fast as they purchase them. and some times
I dont think Capex impact OP Cash flow. ... and FCF was near zero this Q right?
linklinklink profile picture

"share count never really dropped much. they give them away as fast as they purchase them. and some times"

Correct. Share count started rising as soon as they halted the share buybacks.
Sunil Shah profile picture
Business Outlook
The following table presents Micron’s guidance for the fourth quarter of fiscal 2020:
FQ4-20 GAAP(1) Outlook Non-GAAP(2) Outlook
Revenue $5.75 billion - $6.25 billion $5.75 billion - $6.25 billion
Gross margin 34.5% ± 1.5% 35.5% ± 1.5%
Operating expenses $900 million ± $25 million $850 million ± $25 million
Interest (income) expense, net $33 million $30 million
Diluted earnings per share $0.88 ± $0.10 $1.05 ± $0.10
Further information regarding Micron’s business outlook is included in the prepared remarks and slides, which have been posted at

so current street consensus for next qtr is 81 cents

Sunil Shah profile picture
so current street consensus for next qtr is 81 cents!!!
Sunil Shah profile picture
my $100 price target could be in 3 weeks!!
but lets give it a year
S_Archer profile picture
lets see if we get to 60 again
Sunil Shah profile picture
op margin ROARS!!!

percent of revenue 16.3 % 9.2 % 21.1 % 18.0 % 11.3 % 23.2 %
Sunil Shah profile picture
Earnings just released
couldnt be bettr!
beat on rev and margin

Revenue of $5.44 billion versus $4.80 billion for the prior quarter and $4.79 billion for the same period last year
GAAP net income of $803 million, or $0.71 per diluted share
Non-GAAP net income of $941 million, or $0.82 per diluted share
Operating cash flow of $2.02 billion versus $2.00 billion for the prior quarter and $2.71 billion for the same period last year
@Sunil Shah
Did you notice the increased GM going forward?
What do you attribute that to? Node transition cost down?
Sunil Shah profile picture
percent of revenue 16.3 % 9.2 % 21.1 % 18.0 % 11.3 % 23.2 %
Sunil Shah profile picture
@Randall A. Dass

-Margin up big as DRAM in mix rises (higher margin than NAND)
-value added NAND embodying higher margin expected to be 80% of NAND mix. THIS DYNAMIC HAS PREVAILED FOR ABOUT 4 YEARS AS MICRON MOVES UP THE VALUE - ADDED PYRAMID IN NAND)

So despite covid uncertainty and current slack in ASP spot markets, Micron has the conviction to raise margin forecast for August Quarter, attributable to value-added NAND....

Bass12 profile picture
FYI - two updates that SA did not post today 6/25 (not that I think SA moves the market in any way for MU - just interesting):

BofA: reitrerate Buy, $70 PT
Rosenblatt: reiterate Buy, $100 PT

Micron had already raised guidance for May-end 3Q FY20 results on 28 May (GAAP EPS revision +55%, even with +8% sales and +2.5ppt gross margin vs management's view as of 25 Mar). Consensus estimates have also increased QTD. Thus, we acknowledge our positive view on Micron appears in line with both consensus and guidance. That said, management will likely confirm sales/profit improvement for Aug-end quarter (4Q FY20) at 3Q results call (29 June), given (1) stable ASP (or decent increase), (2) volume growth, and (3) cost reduction. Capex cut for FY20 (by 20-30%) is also likely to be reiterated; positive for peers (Samsung/Hynix), but negative for equipment vendors.

Better-than-expected pricing and supply/demand trends along with data center demand as well as the WFH environment’s impact on notebooks and gaming are all highlighted as reasons to be positive. On the other hand, expect these to be offset by “weak trends in smartphones, consumer electronics, and automobiles.”

Looking ahead to the August quarter, Mosesmann expects sales to exhibit a mid-single-digit quarter-over-quarter increase. Improving DRAM and NAND trends - and once more - data center, 5G, notebooks, and game consoles, are all set to drive higher sales. Mosesmann also anticipates smartphone demand to stage a recovery.

“In addition, our sense is that ASP's for DRAM/NAND are on the upswing as stronger segments drive bit demand and near-term weaker segments prepare for a recovery in 2H20,” Mosesmann concluded buoyantly.
Sunil Shah profile picture
@Bass12 there was some slippage in DRAM ASPs in June but immaterial Imo. The trend in 2020 is still up. I really hope MU on earnings call, will not alter the raised guidance from 4 weeks ago because of this slight DRAM ASP wobble...

linklinklink profile picture
@Sunil Shah

Do you have a link to the uptrend?

DrameXchange looks like it's in severe pullback mode.
oak8292 profile picture

Here is a different view on the memory pricing trends from a finished DIMM perspective versus DRAM die perspective.

linklinklink profile picture
Micron always seems to have horrible timing for earnings.

(If this is true)

The final day of June is a week away, & Wall St is already speculating that there’s potential some asset allocators could take big gains from stocks & move into bonds

23 Jun. 2020
@linklinklink why would you buy bonds at this low interest rate? I would rather sit in cash than bonds and wait for an entry.
linklinklink profile picture

The key isn't the interest rate, it's the decoupling between the valuations.
23 Jun. 2020
@linklinklink how are you playing this through individual bonds, ETF or Mutual Funds?
Bass12 profile picture
Seems like every analyst is saying something completely different these days. Here's Baird from this morning (that SA failed to post anything about):

Neutral / $55 PT

We remain constructive on memory trends and expect price stabilization in C2H.
We expect pricing for DRAM and NAND to be flat to slightly up QoQ in C3Q following
significant increases in C2Q. Except in mobile, inventories are lean. Lingering supply
chain disruptions, 2H seasonality, along with easy comps for C2021, lead us to
believe the memory supply chain will be holding inventories, rather than cutting in 2H,
suggesting price stability. For Micron, we are modeling flattish EPS for F4Q followed
by a significant recovery throughout F2021. Neutral-rated

■ Our recent Asia supply chain checks point to an expected stabilization in
both DRAM and NAND pricing into C2Q20, leading us to model flattish gross
margin for Micron for the next couple of quarters, followed by a gross margin
recovery in 2HF2021.
- While the memory consumer market has weakened since April, there are early
signs of consumer improvement.
- Bit growth is expected to be flattish in 2H sequentially following 15% bit growth in servers in 2Q, driven by some inventory builds and as memory capacity shifted from mobile to servers.
■ DRAM pricing C3Q outlook is flat to slightly up QoQ after double-digit increases
in both servers and PCs in C2Q.
- DRAM inventories are high in mobile, low in servers, while PC OEMs continue
to build inventories from current 1.5 months level.
■ NAND pricing C3Q outlook is also flat to slightly up QoQ after a high singledigit increase in C2Q.
- NAND inventories are lean both on the supply and demand sides.
■ Inventory and price stabilization in 2H. Lingering supply chain disruptions,
potential seasonal recovery in 2H, along with easy end-demand comps for C2021,
lead us to believe the memory supply chain will be holding inventories, rather than cutting, in 2H, suggesting price stability.
■ We continue to model $4 in PF EPS (inc. stock comp) for Micron in F2021.
Post an EPS trough in F2Q (ended Feb), we are modeling flattish EPS QoQ for
F4Q (ended Aug), followed by a significant rebound throughout F2021.
- We model annualized EPS of about $5.50 exiting F2021.
Bass12 profile picture
And here is the contrasting commentary from BMO on pricing:

Datacenter fundamentals starting to decelerate for memory. Spot pricing for DRAM started to roll over the last 2-3 months. And if we had thought that the weakness in pricing was short term in nature, we probably would not have changed our view on the shares — especially given what continues to be a largely rational industry. However, our research is suggesting the weakness in spot pricing is likely going to extend into contract pricing soon, and that pricing for DRAM is going to be down q-q, at least for the next 2-3 quarters. We also see the weakness extending to the NAND flash market as well. While investors have been concerned about over-ordering and inventory build in the data center market, consensus estimates are not reflective of the weaker pricing environment. Nor were our estimates until now. We are hearing of orders being readjusted lower in the hyperscale market, as they relate largely to memory, with more of the readjustments lower being directed towards
the DRAM market. We believe the large hyperscale companies have likely adjusted their buying patterns for the 1H/2H from an earlier estimate more in the range of 55/45 to now likely 65/35, with a larger amount of procurement ending up in the 1H. We are also hearing of meaningful downward order revisions from at least one of the larger hyperscale companies, well in the high-double-digit range for 2H vs. 1H. Lowering estimates. We are lowering our ASP assumptions for both DRAM and for
NAND and are consequently lowering our estimates. Our FY20 and FY21 estimates go to $2.47 and $4.40 vs. prior $2.22 and $5.25. We are also lowering our target price to $55 vs. $60.
Bass12 profile picture
Whose "channel checks" are right? Hint: generally, no one's
This is just another situation where I don't necessarily dispute the projection (2020 $2.47 and 2021 $4.40) but I completely disagree with the target price given that projection. I thought Micron would get more credit for surviving this memory downturn cycle and also the COVID-19 situation, but we continue to see price targets that do not reflect that.
Bass12 profile picture
So AAPL and NVDA are ripping on higher forecasts for smartphone units and GPU sales......wouldn't that imply higher demand for memory as well..?

Maybe one day in the 2030's MU will get some love

The argument that is kicking around is that even though AAPL and NVDA use memory in their devices the fact is they can use memory from any of the makers, presumably from the cheapest.

I recall the Jensen was on one of MU videos saying that they worked closely with them but I could be wrong about that.

Right now it is looking like MU will only get love if it becomes an MCP only company.
@Bass12 Ha my comments are all over the NVIDIA thread and I am getting slammed by the NVIDIA crowd for making that argument. I suppose if you are the only one that believes the world is round and everyone else believes it is flat, it doesn't really matter if you are right you still get burned at the stake.
linklinklink profile picture
White House scrambles after trade adviser says China deal 'over'

Peter Navarro blames coronavirus for end of deal, but is promptly contradicted by Donald Trump, who says it is ‘fully intact’

1 hr ago
Stephen Breezy Research profile picture
Taken out of context:


What a spike in the markets. Congrats to the bulls who caught the knife.
linklinklink profile picture
@Stephen Breezy

Yes... Taken out of "context"...

Amazing what a phone call will do.
absarokeedave profile picture
don't worry my post already deleted, I'm sure by divine intervention
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