- Micron and Intel should be the first to bring 3D-Xpoint type technology to the market. The market will re-value the stock higher.
- Mobile phones and more demands on memory will ensure Mobile DRAM profits will continue to grow.
- Equity and Cash balance still look strong despite the new debt that will be added to the balance sheet shortly.
Micron (NASDAQ:MU) operates in the semiconductor space which is a highly cyclical market that could turn at a moment's notice. The stock market, the S&P 500 (INDX:SPAL) lost 75 points last Friday and Micron (being a volatile stock) lost almost 6% to close the day at $13.21 a share. The steep drop in Micron would definitely have forced some investors to sell their shares out of fear.
The technology company is due to announce its third quarter fiscal earnings on the 30th of June and many analysts believe this quarter will be a rough quarter for the company in general. However the Semiconductor sector has been leading the rally in equities since we bottomed in February and Micron has led the charge (see chart). I see this trend continuing (and the market getting rescued again) which will act as a nice tailwind for Micron going forward. I would stress to investors that even if the company loses more than expected this week and the stock experiences a steep sell off, Micron stock in my opinion still has substantial upside potential over the next few years.
The first and main reason I am tracking this stock is because of its 3D X-point initiative which has the potential to be a real game changer for the company. Now we might not see results of this technology immediately (as its not projected to come to market until late 2016 or 2017). Furthermore fears that this technology will cannibalize a sizable portion of the dram market are overblown in my opinion. Yes, you are looking at about 10 to 15% of lost DRAM sales but if (and this is what what would really move the stock) 3D-X-point can be the first of its kind to come to market, then you are looking at premium prices being charged to the customer. Why? Because the potential here to improve storage and memory is much bigger than I believe the market is acknowledging it. Timing will be critical. HP, SanDisk and IBM are all in the process of developing their own equivalents of this technology. Micron (and Intel as its a joint venture) should win the first mover's advantage here. Watch this space.
Speaking of Dram (and this is where we really see the cyclical nature on this industry), demand is expected to grow through the back-end of this year. Now bears are stating that although on the surface, this looks bullish for Micron, the company has strong exposure to the PC market which is projected to continue to fall at the expense of Mobile. However Micron has been slowly transitioning into mobile DRAM and this is where the big opportunity lies in my opinion. Why? Well, mobile phones are going to increasingly have more memory in them which is bullish for DRAM prices.
Just look at how much DRAM prices have rallied this year. The DXI index which measures the market performance of the DRAM market bottomed just before the end of June and has rallied strongly since then. Remember Apple is going to launch its iPhone-7 shortly which again could spike demand for Dram products. We are just starting to see estimates increase for the next quarter (EPS of $0.04) but if the DRAM story continues, this is far too low in my opinion.
What I like about Micron is that as the industry shifts slowly away for Dram and into Nand, Micron has decided to keep its investment in Dram elevated which should mean an increase in market share here as competitors concentrate on Nand. Furthermore I am not worried about Micron losing out in the NAND space as the company has ploughed $2.5 billion+ into 3D-NAND. The company is well aware of the potential profits in this area. Therefore long term debt is expected to spike to $10 billion+ shortly because of the $6.5 billion presently on its balance sheet, the $1 billion worth of senior notes it sold recently and the $2.5 billion it wants to raise for the Inotera takeover. Nevertheless this will still only bring the company's debt to equity ratio to 0.75 which is still attractive considering the investment the company is undergoing.
To sum up, Micron may post a negative number when it announces its earnings at the end of June but there are many factors that could spike this stock around the back-end of this year. The stock may get caught in a current downdraft (combination of a poor set of earnings and an intermediate decline in the stock market) but this would present a strong buying opportunity which should be acted upon in my opinion.