Can Micron Technology, Inc. (NASDAQ:MU) Do Better In 2016?
Micron Technology, Inc. (NASDAQ:MU) is in the process of upgrading its production processes and improving capacity where necessary in anticipation of strong demand. However, the company is also being dragged down by collapsing PC market and weak pricing of SSD products suffering from growing competition.
In the last quarter (F1Q2016), Micron posted mixed results in the sense that earnings beat expectations but topline metric missed the consensus target. Nevertheless, both earnings and revenue declined from a similar quarter a year earlier. In view of the deteriorating conditions in the PC segment, management provided a cautious outlook for the current quarter (F2Q2016).
Micron posted revenue of $3.35 billion in F1Q2016, which descended 26.7% from a year earlier and also fell short of the consensus target of $3.52 billion.
Bracing for tough conditions in DRAM market and possibly continued softness in client SSD pricing, Micron provided a cautious outlook for F2Q. Revenue is expected to be in the band of $2.9 to $3.2 billion. EPS loss is anticipated to be in the range of $0.05 to $0.12.
Micron obtains most of its revenue from DRAM sales, which accounted for 58% of total revenue in F1Q.
What’s thrilling about Micron?
Micron Technology, Inc. (NASDAQ:MU) is on track in shifting its DRAM production technology to 20nm platform in Taiwan. The process upgrade should allow the company to differentiate its DRAM products and also operate the DRAM unit more efficiently, thus allowing for bottom-line improvement. With upgraded DRAM processes, Micron is targeting to increase penetration of automotive, storage/server and smartphone markets.
Micron’s 3D XPoint is also a work in progress with the management predicting that 2016 will mostly be marked by 3D XPoint mode enablement. Commercial production is set to start/increase in the 2017-2018 timeframe. Micron is targeting more than 40% penetration in the server market with 3D XPoint by 2022.
Micron developed 3D XPoint technology in partnership with Intel Corporation (NASDAQ:INTC).
In addition to upgrading its facilities to advanced production processes, Micron Technology, Inc. (NASDAQ:MU) is also investing in capacity and capability. The company has made multiple acquisitions in the recent times and each added specific benefits. The acquisition of Elpida in 2013 helped boost Micron’s global profile, pulling it from the bottom of the top-10 global semiconductor manufacturers by revenue to the top-5 spot. In terms of capacity, Elpida boosted Micron’s wafer production capacity by about 45%.
Besides capacity, Elpida also expanded Micron’s customer roll, adding the coveted Apple Inc. (NASDAQ:AAPL) whose iPhones are also increasingly taking share from rivals and presents an exciting growth opportunity in smartphone space. It is worth noting that Apple is upgrading to higher memory options in its iPhones, because that also allows the company to raise iPhone average selling price (ASP), which is good for its profit story. Apple takes more than 90% of smartphone profits annually.
The acquisition of Rexchip Electronics also bolstered Micron’s DRAM play and other areas of its semiconductor operations.
Micron is in the process of acquiring the remaining stake in Inotera that it doesn’t already own. It presently owns 33% of Inotera and will pay $3.2 billion in cash to acquire the remaining 67%. The acquisition will boost Micron’s DRAM production.
$22.3 billion SSD opportunity
Gartner predicts that the total addressable market for SSD will hit $22.3 billion by 2017 up from $6.9 billion in 2012. That suggest compound annual growth rate of 26% over five years. To benefit from the anticipated growth, Micron is working to enhance its SSD capabilities especially in the enterprise segment. Early last year, the company entered into a kind of technology exchange agreement with Seagate Technology PLC (NASDAQ:STX). According to the deal, Micron will benefit from Seagate’s SSD technology that will allow it to build robust enterprise SSD business. In exchange, Seagate will benefit from certain NAND technologies from Micron.
The deal with Seagate should allow Micron a low-cost opportunity to raise the profile of its enterprise SSD business.
The chart below shows anticipated SSD TTM:
Strong cash flow position
Micron Technology, Inc. (NASDAQ:MU) finished the last quarter with cash and equivalents of $3.64 billion, backed by $1.12 billion of cash flow generated in the quarter. Because of strong cash generation, Micron is flexible in investing in new product development and servicing of existing debts. The company had more than $5.9 billion of long-term debt at the end of F1Q2016.
What’s troubling Micron?
Micron Technology, Inc. (NASDAQ:MU)’s competitors are also upgrading their production processes and adding capacity. That means intensifying competition. There is also the threat of overcapacity that may hurt pricing and ultimately profits. Micron competes for memory market share with Samsung, SK Hynix, SanDisk Corporation (NASDAQ:SNDK) and Toshiba among others.
Softness in DRAM market
Weak demand for PCs and a soft pricing environment for client SSD products combined to dim the lights on Micron’s F1Q2016 and set the tone low for F2Q2016. Management expects the same problems to persist in the current quarter, thus the soft guidance. Because PC demand continues to decay, problems in the market could prolong for Micron, thus escalating uncertainties about the company’s prospects despite management’s promise of long-term growth.
Because Micron derives a significant portion of its revenue from DRAM sales (DRAMs are used in PCs), continued rout in the PC complicates the picture for the company. Micron is the largest producer of DRAM products. Gartner predicts that PC shipment in 2015 may have declined faster than previously forecast.
High capital requirement
Semiconductor is a complex industry to play in even for top-rated players such as Micron Technology, Inc. (NASDAQ:MU). To remain competitive, a semiconductor company must constantly innovate for new products and invest in manufacturing process upgrades. These projects require huge capital investments that may not be readily available all the time, leading to borrowings that leverage balance sheet. Micron reported that its R&D expenses rose nearly 12% in F1Q2016 to $421 million. Expenses relating to selling and administration also spiked 7.3% to hit $179 million in the quarter. But the company can’t stop investing in its business. Trend shows that semiconductor companies can shed significant market share if they delay new product rollout or lag in process upgrade.
Through acquisitions, Micron Technology, Inc. (NASDAQ:MU) has added capacity, technology and attracted high-profile customers. However, acquisitions also present their challenges – integration. Each acquisition is unique and may present a unique set of integration challenges that can prolong the process of absorbing a new business into the existing system or make the process of integration too costly to the point of diluting the intended benefits.
Conditions are improving in the memory market and Micron Technology, Inc. (NASDAQ:MU) stands to benefit from periodic shortages in the supply of NAND flash products, driven by tablets and convertibles. Because of expanded capacity, diversified customer base and differentiated product portfolio, Micron is well-positioned to take advantage of the anticipated favorable supply-demand imbalance in the memory market to grow its topline in the coming years. Shortage in mobile memory supply also means higher pricing, which should enable expand margins to boost its bottom-line as well.
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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