Can Micron Technology, Inc. (MU) Survive Current Pressure In Memory Market?


There seems to be distress in the memory market, and Micron Technology, Inc. (NASDAQ:MU) has not been spared the speculations. However, it is easy for facts to be buried as confusion reigns about whether darkness or light lies ahead for players in the memory market.

A lot has been said about cannibalizing price wars in the memory market, especially the DRAM category, which is leaving everyone vulnerable. Reference is made to the 1H2015 softness where a combination of currency headwinds and excess customer inventory drove worse-than-expected DRAM demand.

Is it a foregone conclusion that weakness in the DRAM market is sending Micron and its peers in the memory business down the drain? Does Micron have a unique set of problems that are causing distress among investors?

What is clear in the case of Micron is that a lot of facts have been disregarded, and here is where analysis of the stock begins.

1H2015 DRAM softness

The decline in PC demand, foreign exchange headwinds and excess inventory with customers combined to cool gains in the DRAM market in 1H2015. However, despite the challenges, Micron proved its ability to grow, even amid adversity, beating fiscal second quarter 2015 estimates.

The company posted adjusted EPS of $0.81, beating the consensus estimate at $0.77. Revenue for the quarter rose 1.4% to $4.17 billion, trouncing the consensus estimate of $4.16 billion.

The gain in revenue was supported by a diversified product portfolio and improvement in operational performance.

Micron generates most of its revenue from DRAM offerings. The company’s other memory offerings include NAND Flash.

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2H2015 DRAM demand

After a tough 1H2015, which Micron Technology, Inc. (NASDAQ:MU) struggled to survive, things are looking positive for 2H2015. Demand for DRAM is likely to increase in 2H, because of a combination of various favorable factors.

New smartphones: The introduction of Apple Inc. (NASDAQ:AAPL)’s iPhone 6S series and Samsung Electronics’ Galaxy Note 5 handsets, will likely boost the demand for mobile DRAM. Chinese smartphone manufacturers, which are battling for control of the lower-tier mobile market, are also expected to drive mobile DRAM demand in 2H.

PC rebound: PC upgrades are expected in the near future, especially driven by Microsoft Corporation (NASDAQ:MSFT)’s Windows 10 release. The launch of Windows 10 is going to reinvigorate the PC supply chain, boosting demand for PCs and thereby generating more PC DRAM opportunities.

Micron Technology, Inc. (NASDAQ:MU)’s strong position in all DRAM market categories positions it well to take advantage of the surge in demand for PCs.

Product diversification

It was diversified product offerings that enabled Micron to beat consensus estimates in its second quarter 2015. Diversified product offerings is a competitive advantage that is likely to benefit the company going forward.

3D NAND offering: Micron is not only moving to the new 3D NAND memory technology, but the company is also working on diversified offerings to ensure that it takes maximum advantage of the market.

In 3D NAND rendering, Micron expects its products to draw more customer interest than competing products because of its unique design structure called floating gate. The company is working on two 3D NAND products that are expected to go into production late this year and early next year. The 3D TLC NAND is expected to go into production before the end of 2015. On the other hand, 3D TLC NAND is expected to go into production in early 2016.

The 3D NAND offerings should open up new growth opportunities for Micron, boosting revenue and the bottom-line in the long run.

Strategic partnerships

Micron Technology, Inc. (NASDAQ:MU) is changing its culture of always wanting to go it alone in memory design projects. The company is beginning to yield for mutually beneficial collaborations, which have the advantage of accelerating its product development, thereby reducing time to market.

As part of its embrace for strategic collaborations, Micron recently entered into an enterprise SSD deal with Seagate Technology PLC (NASDAQ:STX). The company highlighted that the collaboration with Seagate has been able to accelerate its SSD roadmap by at least 15 months.

The partnership arrangement that Micron has with Seagate is not only favorable for its product portfolio narrative, but also to its customers. Through the partnership, the company is able to offer its customers a much simpler SSD rendering.

Areas of concern

Beyond the positives that go for Micron, there are areas where the company needs to work harder to properly shape its future.

High fixed cost: Micron Technology, Inc. (NASDAQ:MU) faces high fixed cost risks given its expanded capacity. The company has been acquiring assets to help it diversify its product portfolio and enhance capacity. These moves are advantageous as long as demand remains high, but could weigh negatively on earnings in a soft demand environment.

Lack of product differentiation: The commoditization of the semiconductor industry also doesn’t bode well for Micron, because there are few incentives for customers to stick to a particular provider.

Inotera stake: Micron looks to Inotera for extra revenue, but fortunes of Inotera have shown a weakening trend. That means Micron may not have much to show from its involvement with Inotera in the 3rd quarter 2015 report coming later this month.

The company obtained $207 million from Inotera in the December 2014 quarter, boosting its EPS by $0.17. However, the contribution of Inotera to Micron is expected to be lower in the 3rd quarter 2015. The lower contribution from Inotera also tells a story about the weakness in the DRAM market.

However, the positive thing in this whole gloomy narrative is that these impacts are expected to be short-lived.

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After shakeup, market stability

Stability in the memory market, especially the DRAM category is expected in 2H2015.

Capacity consolidation: Oversupply caused the disruption in the memory market as witnessed in 1H2015, because customers have excess inventory. However, provider capacity adjustment is expected in 2H as inventory held by customers also falls. Lower customer inventory and capacity adjustments are expected to address the supply glut problem, thereby stabilizing DRAM prices.

Proper capacity adjustments also have the likelihood of driving demand for DRAM.

DRAM price movements: Most of the DRAM price declines have been in the PC segment, but server and mobile categories haven’t been hard hit. Therefore, stability in the PC category bodes well for the entire DRAM market. Micron generates higher gross margins from the server DRAM business than PC.

3rd Quarter 2015 outlook

Micron Technology, Inc. (NASDAQ:MU) expects revenue for the third quarter 2015 (period ended May) to come in at $4.05 billion. The consensus estimate calls for revenue of $4.27 billion for the quarter.

Conclusion

The softness in the DRAM market and all the negativity have already been factored in Micron Technology, Inc. (NASDAQ:MU)’s stock price, considering the recent selloff. For most part, Micron is well-positioned for more long-term gains, because of its diverse product portfolio and improvements in memory market conditions.


Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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