- Ramp Ups In The 3-D Nand & 20-nanometer DRAM product divisions should definitely increase earnings going forward.
- Although Dram prices are falling, areas such as storage and mobile will grow meaningfully by 2020 and Micron will undoubtedly benefit.
- Fundamentals still look strong especially in its diversified portfolio of memory products despite the stock currently trading at 4 year lows.
Despite the fact that Micron (NASDAQ:MU) delivered a weak second quarter where it reported an EPS loss of $0.05, I still believe this company is a sound long-term bet even at the sub $10 share price levels which it is currently trading at. The company's revenue fell by 29.6% YoY to $2.93 billion which was well behind the $3.27 billion initially projected. However the top line drop was mainly due to dram average selling prices being 10%+ lower than normal as well as volume also not being as it usually was.
Weak end-market demand combined with ongoing technology migrations really affected margins in the company's second quarter. In fact, Micron’s gross margins continued their decline and slumped to 20% in the second quarter which was a 500 basis point drop on a sequential basis. However pulling back the curtains on how Micron is transitioning paints a completely different picture of where this stock is headed.
Micron's near term objective is to roll out its advanced dram and nand technologies, while at the same time, control its costs diligently. With dram, Micron has gained several customers for its 20-nano-meter DDR4 products, which looks promising on the surface. Furthermore, the company is confident about its 20-nano-meter LPDDR4 solutions and expects the uptake to be strong among mobile customers before the end of the current quarter. Therefore, for the third quarter, the company is predicting solid double-digit growth at better costs for DRAM while volumes for its 20-nano-meter technology are also expected to improve.
I believe this trend will continue, which should boost earnings and margins in subsequent quarters. Micron is also upgrading its 3D NAND SSD models for enterprise and client applications and subsequently expects these models to gain traction at decreasing cost-per-bit rate from Autumn 2016. This is why the back of 2016 and start of 2017 should be much stronger than present conditions. The market definitely hasn't been sold on Micron's growth sectors going forward and when it does, I expect the stock to be trading much higher than it is at present.
Secondly, even though dram prices continue to fall, Micron is actually in a favorable position in this area of its business and because of how it is managing its transition. In fact, Micron has been slowly cutting down on its PC production and moving more hastily into the faster growth areas such as mobile. Now the decline in the overall dram market should mean more market share for Micron going forward as consolidation has meant that fewer players are now operating in this space.
Also, the company's transition to 20NM means that market share growth should take place meaningfully (manufacturing costs will be cheaper) as this technology is only being used by Samsung at present. Prices may be going down in this market but areas such as "service & storage", "automobiles" and "smartphones" will continue to keep dram demand elevated in the years to come. What's the takeaway? Ignore declining dram prices. Micron is set-up to do very well in other faster growing segments where demand will continue to grow.
So how do we play Micron stock going forward? Well if we look at a daily chart, we can see that the stock is trading at very strong support currently (roughly around the 2010 and 2011 highs). Furthermore, I believe the S&P 500 (INDX:SPAL) either printed its daily cycle low at 2,040 or will print a lower low in the next 5 to 7 days which is crucial as a rising stock market should act as a tailwind for Micron stock.
Micron's dismal 2016 performance has meant that its earnings multiple has dropped to 9.9 and its sales multiple has dropped to 0.8 which are well below historical averages. However, the balance sheet is still strong in my opinion as the company's debt to equity ratio is still only 0.53. If we get a lower low on the S&P500, it will only be short term. Therefore, use any more weakness in Micron to get long as its long-term fundamentals look sound to me despite ongoing near-term headwinds.
To sum up, Micron simply has too many growth triggers which is why I believe the stock will print a bottom soon. In fact, the company is forecasting a breakthrough in the near term which is why further weakness in the share price should be limited. On the dram side, it's all about gaining market share through better technology and lower pricing, which will propel the company forward. If Micron can innovate and reduce manufacturing costs at a faster rate than general dram price cuts, then the company will grow. You can't judge Micron from recent past endeavors. Look at its pipeline and get in along with the smart money now.