- Despite weak conditions for the memory market, I see strong growth prospects for Micron.
- The move to the fast-growing 3D NAND memory technology for SSD will give Micron a significant advantage.
- The average target price of the top analysts is at $16.07, an upside of 10.7% from its August 5 close price.
Solid state drives (SSDs) are a strong growth driver for the NAND flash memory industry. According to marketsandmarkets.com, the solid state drives market was valued at $13.29 billion in 2015 and is expected to grow at a compounded annual growth rate (CAGR) of 9.5% between 2016 and 2022.
Historically, SSDs which are much faster than hard disk drives (HDDs) have been very expensive, which has prevented much use of SSDs in PCs and data centers. However, their prices have been falling significantly, but HDDs still have a price per gigabyte advantage.
According to anandtech.com, the industry sold a total of 30.8 million SSDs in the first quarter of 2016, up 32% from 23.2 million in the first quarter of 2015. By contrast, shipments of HDDs collapsed by 20% year-over-year. What's more, the growth of SSDs has been consistent despite slowing sales of PCs and HDDs for several quarters.
In the third quarter conference call, Micron CEO Mark Durcan said:
"Our storage business unit is in the midst of refreshing its SSD portfolio with a higher capacity 3D NAND memory technology. We also introduced Micron Accelerated Solutions, which are enabled by our enterprise SSDs and advanced DRAM, integrating compute and storage to improve efficiency and performance in a variety of storage applications. And we announced our new 110 SATA client SSDs leveraging triple level cell 3D NAND for class-leading performance and power efficiency."
As I see it, the move to the fast-growing 3D NAND memory technology for SSD will give the company a significant advantage and could be a key growth driver for Micron. In March 2015, Micron and its joint-venture partner Intel (NSDQ:INTC) announced the availability of their 3D NAND technology, the world’s highest-density flash memory. According to Micron, this new 3D NAND technology stacks layers of data storage cells vertically with extraordinary precision to create storage devices with three times higher capacity than competing NAND technologies. While Samsung was the first to introduce the technology, Samsung and Micron are more advanced over other producers in the production of the 3D NAND technology.
Third Quarter Results
On June 30, Micron reported its third quarter fiscal 2016 financial results. Although the company suffered an adjusted earnings-per-share loss of $0.08 in the quarter, it was lower than analysts' expectations for a loss of $0.09. Micron’s revenues in the quarter decreased 25% year-over-year to $2.9 billion slightly missing average analysts' estimates for revenue of $2.96 billion. The company reported an earnings surprise in ten of its last eleven quarters, as shown in the table below.
Data: Yahoo Finance
In the report, CEO Durcan said:
"Although we have made good progress in deploying our advanced DRAM and NAND technologies, we continue to face challenging market conditions. To address the current market environment and strengthen our competitive position, we are implementing a number of initiatives to reduce costs, drive greater efficiencies, and increase focus on our strategic priorities."
Also for the fourth quarter, the company expects a loss due to weak market conditions, as shown in the table below. Micron guided for revenue of $2.9 billion to $3.2 billion in the current quarter, with the high end touching the consensus of analysts for $3.2 billion.
However, the company is implementing some initiatives to reduce costs. Micron plans to consolidate projects and facilities, halt all new hiring, and reduce personnel as it downshifts amid structural and cyclical challenges in the memory market. According to the company, the cost-containment program was designed to save Micron approximately $80 million per quarter by fiscal 2017. About half of these savings will appear on the gross margin line, while the other half will appear in operating costs.
Year to date, MU's stock is up 2.5% while the S&P 500 index has increased 6.8%, and the Nasdaq Composite Index has gained 4.3%. However, since the beginning of 2012, MU has gained 130.8%, in this period, the S&P 500 Index has increased 73.6%, and the Nasdaq Composite Index has risen 100.4%. According to TipRanks, the average target price of the top analysts is at $16.07, an upside of 10.7% from its August 5 close price, which appears reasonable, in my opinion.
MU Daily Chart
Chart: TradeStation Group, Inc.
Micron's valuation is good. Although the trailing P/E at 41.72 is high, and the forward P/E is also high at 28.47, the price to cash flow is very low at 4.50, the second lowest among all 67 S&P 500 tech companies. Furthermore, the Enterprise Value/EBITDA ratio is very low at 5.45, the price to sales ratio is low at 1.18, and the price to book value is also low at 1.24.
The ten S&P 500 tech companies with the lowest price to cash flow ratio:
Despite weak conditions for the memory market, I see strong growth prospects for the company. Micron is deploying its advanced DRAM and NAND technologies and improving its cost structure. In my view, the move to the fast-growing 3D NAND memory technology for SSD will give Micron a significant advantage and could be a key growth driver for the company. Micron's valuation is good; the price to cash flow is very low at 4.50, the second lowest among all 67 S&P 500 tech companies, and its EV/EBITDA ratio is also very low at 5.45. The average target price of the top analysts is at $16.07, an upside of 10.7% from its August 5 close price, which appears reasonable, in my opinion.