- Micron shares have doubled in value over the past few months, but the rally may still continue.
- NAND prices have risen by about 13% since August, with another 6% increase projected to occur before 2016-end.
- The chipmaker could report a significant margin expansion over the next few quarters.
Shareholders of Micron Technology, Inc (NASDAQ:MU) have been on a roll for the better part of 2016; the stock price of their company has appreciated by 102% over the past 6 months alone. With such a blockbuster rally behind it, conventional wisdom would suggest that not much upside would be left in store. But that’s not necessarily the case here. The chipmaker continues to benefit from industry-wide tailwinds that could propel its stock further as we near the end of 2016. Let’s take a closer look to know why I believe Micron stock has still more upside.
Let me start by saying that Micron has exposure to broadly two types of memory segments – NAND and DRAM. I’ve already covered in detail how improvements in DRAM pricing and supply/demand trends would positively impact the chipmaker's financials going forward. So, I won’t be covering the same topics again. But that’s not the only positive catalyst out there that can drive its growth; NAND-related pricing and supply/demand trends are favorable and could propel its growth also.
We saw over the last year how prominent memory majors slashed their DRAM output to ramp up their NAND production. And we also saw that Samsung Note 7, which was projected to have sales around 19 million units for 2016, was discontinued due to its battery issues. So there was essentially a significant increase in NAND supply this year. Yet, and I’d like to emphasize this point, NAND prices (64Gb MLC to be precise) surged by 6% in September and reached their 2 year highs, at $3.3 per module. I checked the spot price of the aforementioned NAND module today and the price has risen to $3.54 a piece, representing another 7.2% increase since September.
Ideally, whenever supply increases are not matched by the subsequent rise in demand, the price of the concerned commodity declines. However, that clearly didn’t happen in the NAND segment owing to an uptick in the commodity’s demand.
But this isn’t the end of this growth story. Handel Jones, CEO of IBS, recently noted that NAND prices could further increase by another 6.2% by the end of 2016 on about 36.2% higher bit volumes. If these numbers are correct and stand the test of time, then NAND producers are poised to make a lot of money going forward. They are producing more modules, yet demand appears to be outstripping supply, leading to a continued increase in NAND spot prices. It’s a great position to be in and I believe this scenario would last for the next few quarters at least.
The Big Impact
Improving prospects of the NAND industry bode well for all NAND manufacturers, Micron included. I’d like to point to readers that Micron generated a healthy 33% of its revenues from the sale of NAND products last year; this figure is up from 30% in the year prior to that, which happens to be FY15. Therefore, I think its needless to say, rising NAND prices, without being accompanied by proportional rise in production costs, would only expand the chipmaker’s gross profit.
(Source: Micron’s 10K filing)
Readers should note that back in March, there was a situation of NAND oversupply, which resulted in distressed spot prices of the commodity. The analyst community downgraded the company, lowered projections for it, and the stock took a beating due to its compressed margins. But now the situation has reversed and the exact opposite has happened – NAND prices have increased substantially. So analysts could upgrade their targets for Micron accordingly, in large numbers.
Analyst upgrades don’t always have a direct impact impact on any company’s stock price, but their upgrades do help in improving the market sentiment for retail investors at least.
More to the point, as the table below illustrates, Micron has been reporting declining ASPs in both DRAM and NAND segments for the past 5 years. But it’s the non-volatile segment that has seen a continuous, back-to-back downtrend in ASPs year after year. So a sustained uptick in NAND prices could potentially break the trend, or at the very least, mitigate the downside to a certain extent.
(Source: Micron’s 10K filing)
The financial benefits of rising NAND prices for Micron don’t necessarily end here. It’s acquisition of Inotera will be completed in first half of December. I explained in my last article that this move would lower the joint entity’s overall leverage levels. I’m of the opinion that this would put Micron in a better position to tap debt and secondary markets to raise funds, to announce the expansion of NAND production. I’m guessing such an announcement could come sometime in the first half of next year. This is pure speculation on my part but it’s a very real possibility.
Putting it all together
Micron stock was berated when its margins were shrinking due to distressed NAND margins. But now that the trend has reversed and price of the commodity is expected to further increase going forward, its stock may very well offer more upside for shareholders from hereon. This, coupled with all the aforementioned positives, lead me to believe that Micron hasn’t topped out yet.
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