- Micron' competitors have downsized their Dram exposure so Micron is set to win market share here.
- Nand is the future which is why the company is restructuring to concentrate resources & Micron has a leading cost position here.
- 3D X-point technology will be on the market before many think. Micron along with Intel should have first movers advantage here.
Micron Technology, Inc. (NASDAQ:MU) stock has recovered well from its fiscal third quarter earnings as its stock has bounced back from $11.56 a share to the $13.30 level in the space of 2 weeks or so. The stock sold off after earnings because of near term poor guidance but investors need to look at the long-term picture here. There is absolutely nothing Micron can do to control the price of its products and that was reflected in its recent earnings which is why operating income and gross margin declines have to be taken with a grain of salt.
Micron is currently going through a phase where investment is elevated (3D Nand & 20 Nanometer Dram) and realized prices of memory products are falling (see chart). This has lead to a decline in its margins which has resulted in losses in earnings over the past 2 quarters ( -$215 million reported in 1st quarter alone). The company has responded by announcing a restructuring plan which should buy Micron time until the market turns. Ultimately it's all about demand because if demand spikes in the near term (as is predicted for Nand by the end of the year), then Micron will do very well as price increases and restructuring will surely boost profits. It's a big risk/reward play. Here are things to watch out for.
Expected To Gain Market Share In Dram
As the industry transitions from Dram to Nand, it looks like Micron has bought itself time with respect to increasing its exposure in the Dram space despite competitors such as Samsung SK Hynix decreasing theirs. We saw this trend last quarter. Both revenue and items shipped (9% and 22% growth) grew which was promising considering the present pricing environment.
Here is the dynamic of Micron's Dram division at present. The transition to the 20nm node will definitely continue to improve costs and as long as Samsung and the like keep their production levels under control, Micron should gain more and more market share in this area. Bears will state that Dram is not where the future of this industry will reside and that may be true. Nevertheless, Micron is guiding around 30% growth in its Dram bit both this year and next so expect another bump in revenues in the fourth quarter. Staying aggressive in Dram buys Micron time. It's a calculated risk despite Micron's restructuring plan whose goal is to transfer more resources to the Nand side.
Costs To Decrease More In 3D-Nand Than Competitors
And this is why many analysts are bullish on this stock. Micron feels that its top line will grow at least over 30% both this year and probably more the next because of its 3D Nand technology. Many of Micron's competitors are knee deep in rolling out production of this technology and with good reason. Demand is set to soar (whereas Dram will fall off) in the next few years but Micron looks like it is in a favorable position. Why? Well, again we come back to cost. Micron has been busy progressing 3D Nand Generation 1 which supposedly will bring a 20% cost benefit compared to general 3D Nand designs.
Furthermore, if generation 1 is anything to go by, "Generation 2" which will go live in fiscal 2017 should be a big improvement on the former from a cost perspective. Will the likes of Toshiba and SanDisk be able to compete? Time will tell but at the moment, Micron seems to be leading the pack when it comes to providing this technology at the best cost. If this trend remains, Micron will get a "First Mover Advantage" which should do wonders for its earnings once these products start to be shipped.
3D X-point Could Change The Industry
Investing in this sector requires a sharp mind because you must focus a lot of your due diligence on what is coming down the track. If what we are told is true and that Nand demand is set to spike in the next few years, then Micron is in a favorable position. However, this sector is highly competitive, product lifecycles are short and furthermore, products end up being very similar after a while until a new wave of technology comes round.
This is why it is all about investing in the future so the company can remain one step ahead of the posse. Therefore the company's 3D x-point is an exciting piece of technology as it has the potential to turn the industry on its head. Why? Because the Micron/Intel partnership is stating that this piece of technology is 1000 times faster than Nand flash. Transformation is the word being touted about for this piece of technology and Micron is at the cutting edge. Along with 3D Nand, this could be a game changer.
To sum up, although Micron has had a torrid time over the last 18 months where its share price has dropped by over $20 a share, the tide could be turning for this memory manufacturer. It is all about market demand and the respective cost position (compared to the competition) of the company at a given point in time. It's time for Micron to realize its potential.