It’s Too Early To Celebrate Micron Technology, Inc. (NASDAQ:MU), But Here Are Key Takeaways
At a recent technology conference, Micron Technology, Inc. (NASDAQ:MU)’s representatives continued to exude confidence about the long-term future of the company despite the near-term industry pressures. Micron insiders believe that the PC market is beginning to stabilize in the second half of 2015 after a brutally weak first half of 2015. The Windows 10 refresh and roll out of Intel Corporation (NASDAQ:INTC)’s Skylake CPU are cited among potential drivers of strength in the PC market. Any sign of PC stability should go a long way into changing the narrative around the company. Negative investor sentiments amid declining PC memory demand and weakening prices of the same have contributed to the more than 50% collapse of Micron’s stock.
The worst is certainly not over for semiconductor memory companies, but there are signs of easing pains in the case of Micron.
PC sales seen bottoming up
Micron draws a significant portion of its DRAM revenue from the PC market, which is why the health of the PC industry weighs heavily on the company’s financial performance, for better or for worse.
IDC predicts that PC shipments will this year shrink 6.2% compared to the previous year. In its previous prediction, IDC called for the PC shipment to contract 4.9% this year, which means that the firm sees stronger headwinds for PC players in 2015 than 2014.
Despite the gloomy PC demand predictions for this year, many industry experts, including players such as Micron, are seeing that the PC market is beginning to solidify. The Windows 10 release in late July and the launch of Intel’s Skylake processor are expected to spur PC demand in the latter half of 2015 going into 2016. The growing memory content on PCs is also likely to widen DRAM sales in the PC market.
PC sales account for 30% of Micron’s DRAM sales with mobile, server and automotive/industrial applications accounting for 25%, 20% and 25%, respectively.
DRAM is secured by higher barriers to entry
DRAM is the largest segment of the semiconductor memory business, accounting for about 57% of revenue. There are high barriers to entry in the DRAM space and the industry is also highly cyclical. All of these factors explain the ongoing consolidation in the space and why the future is bright for those that are able to sustain their stay in the DRAM business.
The top three major players in the DRAM industry control about 93% of the market, and Micron Technology, Inc. (NASDAQ:MU)is one of them. Micron’s share of the DRAM market (Garner 2014) is 23%. Samsung Electronics leads with 41% share of the market and SK Hynix comes second with 30% share of the market.
Shift to high-growth segments
Micron is not attempting to put all its eggs in one basket. The company remains committed to the PC market, which the management sees as an opportunity to continue squeezing money. However, Micron is shifting its bit production to faster-growth segments, such as mobile, cloud server and automobile/industrial, to hedge against PC decline and also tap new growth.
In mobile, the rising smartphone shipments and increasing memory content on smartphones have created exciting opportunities for Micron to drive DRAM sales outside of the legacy PC market.
The server segment is also attractive in several ways. Demand for server memory is rising and the server memory market is also less sensitive to price adjustments. As such, Micron is presented with the opportunity to sell a large volume of server DRAM at higher prices.
The automotive segment is quite small presently, but is expanding at between 10% and 15% every year. The exciting thing about the automotive memory market is that margins there are higher than the corporate average. As such, targeting the automotive memory market presents Micron with the opportunity to tap higher profits than it is able to do in other segments. Although winning automotive sockets can be challenging, the challenge is offset by the high stickiness of auto customers. Once an automotive socket has been secured, Micron is able to serve that market for several years – up to seven years.
Investing in the future
To grab the various opportunities in the memory DRAM market, Micron Technology, Inc. (NASDAQ:MU) must be ready for the opportunities. As such, Micron intends to spend between $5.3 and $5.8 billion in capex in fiscal year 2016, a capex allocation that is higher than $3.6-$4.0 billion for 2015. The management calls the boosted capex a reasonable investment in the future. In other words, Micron is willing to sacrifice its present on the altar of a better future.
Among other things, Micron will be investing to push forward its DRAM 3D NAND memory technology as well as 3D XPoint technology.
Pain points for Micron
As much as the future of Micron is promising on various accounts, the company will have to endure some near-term pressures.
Volatile pricing environment:
Average selling price (ASP) volatility poses serious threat to Micron’s memory business. The company has historically been affected by ASP that falls faster than the cost of production.
The memory business is a cyclical one in which demand goes up in some periods and down in other periods. Adverse demand fluctuations can have material impact on Micron’s balance sheet and cash flow.
Risks of acquisition:
Micron acquires strategic assets from time to time. While acquisitions are helping the company to bolster its competitive edge and mitigate the impact of business cyclicality, absorbing acquisitions always comes with substantial risks. As such, in the event that Micron continues its acquisition and lands a business that is problematic to integrate, the company’s performance can be adversely affected.
There have been rumors that China’s Tsinghua Holdings is targeting Micron Technology, Inc. (NASDAQ:MU) for a buyout at about $21 per share. Although there have not been any public pronouncements from Tsinghua regarding a bid for Micron, there are potential risks to such a deal.
Tsinghua is backed by China’s government, and that alone could increase regulatory scrutiny, raising uncertainties. The other risk is that it is difficult to tell whether Tsinghua would be able to make a sweet enough offer that Micron would accept.
Because of the cited complexities and uncertainties, Tsinghua may attempt to acquire Micron and then fail, in which case it can turn its attention to other alternatives. If Tsinghua does pursue alternative acquisitions, the result could be more capacity in China’s semiconductor memory market that would eventually depress prices.
The narrative at this juncture is that Micron Technology, Inc. (NASDAQ:MU) is investing in its turnaround and the intermediate will remain under pressure. Afterwards, a dazzling future is beckoning.
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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