- Micron shares have sold off heavily after the company missed its earnings estimate for the third quarter running.
- This has been orchestrated by weakness in PC demand which has badly impinged Micron's revenue.
- Micron-Intel are due to start shipping 3D NAND chips later in the year and ramp up production in 2016
- This will cut down the company's relaince on PC DRAM chips and gives Micron shares significant long-term upside
Micron (NASDAQ:MU) shares have given up about 20.6% after reporting yet another awful quarter and issuing light guidance in what is turning out to be the company’s annus horribilis. Micron blamed weak PC demand and DRAM pricing pressure for the earnings miss. Wall Street seems divided about the company, with the bear camp issuing downgrades while the bulls are saying buy. Micron stock price is down 45.5% YTD. Has all the bad news been baked into MUs shares? Is this another case of big bath accounting where MU is using a weak year to throw in all the bad news so as to set up easier comps in the coming fiscal year? Does this make Micron stock a value play or just another value trap?
The biggest reason why Micron stocks keeps getting hammered every so often is because the company relies rather too heavily on PC DRAM chips. About 67% of Micron’s top line is driven by DRAM chips, with PC DRAM memory chips accounting for about one-third of the company’s revenue thus leaving Micron badly exposed to the whims of the highly cyclical industry.
Micron and Intel (NASDAQ: INTC) formed a joint venture in 2006 to manufacture NAND flash memory products. Micron is currently the majority owner of the JV, also known as IMFT (Intel-Micron Flash Technology), after it bought out 30% of Intel’s stake in the venture for $600 million to bring its own stake up to 51%. The two companies are currently hard at work developing the so-called next-generation flash memory - 3D NAND. 3D NAND is a new type of flash memory that uses vertical interconnects to stack die memories vertically on top of each other thus allowing for higher memory cell density than what is achievable with 2D, or planar, NAND. 3D NAND chips are reputed to give 10 times the reliability of 2D NAND as well as twice the write performance.
3D NAND is a relatively new technology and Samsung is the only major tech company that is currently shipping flash chips built on the architecture. TrendForce estimates that 3D NAND currently accounts for just 3% of total NAND market because most manufacturers are still in the sample testing and delivery phase. IHS Research, however, had put forth estimates that 3D NAND could make up as much as 67% of total NAND market by 2017.
The beauty of NAND is that the architecture can be put to a wide variety of applications. NAND chips are used in tablets, smartphones, SSDs, cameras, gaming consoles, robotics, camcorders and other applications. NVMdurance provided estimates that the NAND chip market was worth worth $35 billion in 2014 and projected it to grow at a healthy 18.8% CAGR through 2018, making it the fastest-growing chip product in the history of the semiconductor market.
Micron had NAND market share of around 13.7% at the end of 2014, translating to roughly 30% of its revenue. But with 3D NAND expected to dominate the NAND industry over the coming years, Micron now has a good chance to grow its NAND revenue significantly and minimize its reliance on PC DRAM chips for its top line.
The terms of the IMFT JV seems to favor Micron more heavily than it does Intel. The buyout clause on the contract gives Micron the right to buy back the remaining stake from 2018, with Intel financing the buyout of the stake. Though it’s not very likely that Micron will exercise this right due to the fact that Intel can counter by launching a hostile takeover bid for Micron which would be a walk in the park for the chip giant really due to its financial wherewithal and also, due to the fact that Micron still needs Intel’s MLC, or Multi-Level Cell, chip technology that Intel has cross-licensed to SanDisk (NASDAQ: SNDK), an important Micron partner, it nevertheless helps to cement Micron’s leading role in the JV.
I expect NAND chip contribution to Micron’s revenue to grow from 30% currently to 50%-60% by 2018. This should help Micron cope better with the cyclicality of the PC industry and give good upside to MU stock. I would therefore reiterate Needham’s Buy rating on MU stock for long-term investors with a $40 PT achievable in 12-18 months (more than 100% upside to current price). Over the short-term, MU shares are likely to remain in the doldrums up until the final quarter of the year due to the expected DRAM undersupply during the second half of the current year.
Also see: Micron stock analysis video based on Fundamentals.