Why You Might Not Want To Run Away From Micron Technology, Inc. (NASDAQ:MU) Just Yet
The narrative around Micron Technology, Inc. (NASDAQ:MU) is rapidly changing – to the negative. After gathering huge gains starting early 2013, capitalizing on strong demand and high chip prices, the company has given up a significant chunk of those gains. The stock has collapsed about 50% within the past eight months, and there are fears the fall could continue.
With the stock of Micron appearing to be on a free fall, investors have been asking for the money as they head for the exit door.
Does it look like hell has broken loose for Micron and there is no hope staying put in the stock or adding it to your portfolio? Stay tuned for facts about Micron that might make you have a different view of the stock.
Soft DRAM demand births oversupply problem:
Micron Technology, Inc. (NASDAQ:MU) is battling soft memory demand, especially in the PC DRAM market. The rise of smartphones and tablets is cannibalizing the personal computer market, and makers of PC chips are feeling the heat.
The softness in the PC end market means that there is huge DRAM inventory buildup with the OEMs. The result is that the DRAM market has been thrown into a situation of oversupply, which has given way for another problem – weak average selling price (ASP).
Oversupply situations births weak ASP:
Demand for DRAM is falling faster than suppliers are able to cut capacity. The result is that chipmakers are trying to cut prices to encourage uptake. This in turn has created a weak ASP situation, and the problem is compounded for Micron because ASP is declining at a faster rate than it is able to lower costs.
Soft demand for PC DRAM and lower ASP are just part of the problems facing Micron. Competition is another serious headache.On the issue of competition, Samsung Electronics is making huge price sacrifices to enable it to grab more share in the memory arena, especially in the mobile segment.In this situation, competitors like Micron can either follow with price cuts of their own to defend market share or risk losing customers to Samsung.
A tough competitive situation means that there is limited room for Micron to drive gains in the mobile market to help offset PC softness.
Is Micron doing anything?
There is no doubt that greater attention has been given to Micron’s problems than the efforts it is making to address those problems. As such, it has been difficult to get a fair assessment of the situation facing Micron, much less, the management’s view of the situation.
Sacrificing the present for tomorrow
The management of Micron acknowledges that the company is not in a desirable situation presently. From soft demand to lower ASP to intense competition, Micron is facing pressure from almost all directions. With the grasp of the problem, the management of Micron considers it already has half the solution.
There is a sacrifice that the management of Micron is making- laying the ground for a better tomorrow at the expense of here and now.
For investors who are looking for immediate gains in Micron, there is no good news. The management of Micron has figured out that plotting for the long-term growth and profitability of the company makes plenty more sense than pursuing short-term gains. For that reason, the stock of Micron might remain under pressure in the near-term as the management pays attention to the long-term growth.
Micron Technology, Inc. (NASDAQ:MU) plans to invest between $5.3 and $5.8 billion in capital projects in fiscal year 2016, which is above the $3.6-$4 billion capital expenditure budget for the current fiscal year (2015).
Among other things, the planned capital spending for fiscal year 2016 will go to expansion of Micron’s factory in Singapore and expansion of the Boise research center.
Micron’s massive capital expenditure plan for fiscal year 2016 may worry some investors, but the company’s capital budget is justified by a number of factors. First, the semiconductor industry is naturally capital intensive, which is why Micron’s increase to a $5.8 billion capital budget is not strange.
Second, Micron is shifting its chip architecture to a more advanced technology, for example 3D NAND. Such shifts require a lot of investment in plant upgrades, which is exactly what the company plans to do in fiscal year 2016 so that it stays competitive in the memory business.
Third, Micron values product innovation because it is through innovation that it is able to add value to its memory products to earn competitive advantage. For that reason, the expansion of the Boise campus is part of the efforts to give more attention to research efforts.
For that reason, Micron believes that while it may face pressure in the present times, the investments it is making currently will pay off in the not so distant future.
Where MU hopes to gain
Micron has a diversified business model than span PCs, servers, telecom, networking, automobile and mobile. While the PC segment appears to be shrinking and competition being intense in the mobile space, Micron is banking on innovation to stay relevant in these markets.
PCs will not completely go away and Micron is hoping it can defend its share and grab more market share through bolstering the value proposition of its PC offerings.
In the mobile space, Micron is looking to capitalize on customer requirements for faster performance and energy efficiency to drive competitive advantage in its products.
Acquisitions and risks of the same
Micron Technology, Inc. (NASDAQ:MU) is known for tapping strategic assets from time to time. The company may consider doing the same in the near future to speed up the realization of benefits from its various efforts, especially in the DRAM space which is undergoing consolidation. Micron finished the third quarter with $4.86 billion in cash and short-term investment, enough for small acquisitions that add value to its various projects.
However, while acquisition may come with benefits, and they usually do, integration challenges are never far from the surface. On a bad day, acquisitions can take a long time to successfully integrate, delaying the benefits that Micron intends to achieve or increase integration costs, thus diluting the benefits.
For the investors looking for the here and now gains, Micron Technology, Inc. (NASDAQ:MU) isn’t a suitable pick. But for the investors who are willing to exercise patience, Micron is brewing great things worth the wait.
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.
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