Source: This article was translated from marketrealist by Semiconductor Industry Observation, thank you.
Micron Technology reported strong results and guidance, but its stock price didn't grow at the same rate as its earnings. In the second quarter of 2017, Micron's revenue grew 92% year over year, but its stock price is up 84% over the past 12 months.
memory peers Samsung and SK Hynix also show a similar trend. Slowing memory stock price growth has investors worried that the memory market has peaked and will fall. This assumption of cyclical behavior in the industry is making investors cautious.
However, the memory industry has changed dramatically over the years. Memory suppliers have consolidated and demand has spread beyond PCs and smartphones into data centers and cars. All the statistics point to a favorable environment for memory vendors.
Micron said that the emergence of autonomous driving, the Internet of Things, machine learning and big data analysis has made memory and flash memory an important part of the industry. In fact, some analysts note that non-volatile memory makers are witnessing strong growth while microprocessor makers such as Intel and AMD are losing influence.
According to the August 2017 report of WSTS (World Semiconductor Trade Statistics), global semiconductor sales are expected to grow by 17% year-on-year, with memory chip sales growing the fastest, reaching 50.5%.
Micron is one of the top suppliers of DRAM (dynamic random access memory) and NAND products. Its specialty DRAM products are increasingly used in servers, tablets, PCs, mobile phones and computer peripherals. The company is a leader in the automotive memory market.
In terms of DRAM, there is no new supply in 2018, but demand from Nvidia, Apple and Nintendo is growing. DRAMeXchange stated that DRAM average selling prices increased by 40% quarter-on-quarter in the second quarter of 2017. Against this background, the two-week shutdown of Micron's Inotera DRAM factory in July 2017 may further tighten supply and push up DRAM prices.
When it comes to NAND, Micron has the smallest die size in the industry.
Since 60% of Micron's revenue comes from DRAM, investors are worried that other memory manufacturers will increase their DRAM capacity and create a supply glut. If that happens, Micron will face a major blow. As new peaks arrive, investors worry that this is the end of the peak period, but there is no conclusive data to suggest that the peak is coming.
As a result, Micron shares are not trading above $33, making it the cheapest memory company stock with strong growth potential.
Which manufacturer is benefiting from the current memory cycle?
Memory is a commodity and its price is mainly affected by supply and demand factors. This highly cyclical market exposes pure-play memory manufacturers like Micron Technology to be highly volatile.
The last time the memory market peaked was in late 2013, and it has only begun to decline since then. Although Micron's stock rose for four more quarters this fall, it began to fall again in early 2015.
Assuming the current memory uptrend is similar to 2013 - peaking in Q2 2017 - then Micron shares have 4 quarters of growth before falling. Nonetheless, all memory manufacturers still expect their revenue to grow in Q3 2017, indicating that the cycle has not yet reached its peak. This leaves a lot of room for memory reserves to grow.
However, the current memory cycle is different from the past. This cycle appears to be more favorable and profitable for memory vendors. The current memory market is dominated by just three companies - Micron, Samsung and SK Hynix - which hold the majority of the market share. This helps them control supply more effectively than before.
On the demand side, memory chips have moved beyond personal computers and mobile devices into the Internet of Things, cars and servers. Future trends in artificial intelligence, self-driving cars, virtual reality and data analytics are also increasing demand for higher-priced specialized memory chips.
The current memory market is not only more profitable for memory vendors, but also less risky.Since the memory market is controlled by three memory giants, they can maintain tight control over supply.
All three DRAM giants are enjoying strong profits and are in no rush to expand capacity. Most of the capacity growth will come from the transition to advanced technologies rather than capacity expansion, as the cost of building new manufacturing equipment increases significantly.
Unless DRAM demand exhausts the capacity created by the technology transition, memory manufacturers may avoid investing in new capacity.
Meanwhile, China invested $160 million to manufacture memory for the domestic market. This has sparked concerns that China could flood the market with cheaper memory chips, affecting the memory industry's profits. However, China lacks the necessary intellectual property to efficiently manufacture competitive memory chips.
's current memory cycle is less risky and more profitable, which increases Micron's profits and cash flow. That means Micron's stock could break out of its 2014 peak of just over $36 and reach $40 or higher, based on the latest analysts' estimates.
Do Micron's management changes mean new hope?
Micron Technology is looking to take advantage of the changing memory market to maximize profits. This requires a fresh perspective, which is what the new CEO is expected to bring to the company.
Sanjay Mehrotra is the former CEO of SanDisk, which was acquired by Western Digital (WDC). Mehrotra took the helm of Micron in April 2017 after Mark Durkan retired. Just four months later, Mehrotra brought three people on board from SanDisk.
Mehrotra hired Jeff VerHeul, senior vice president of engineering at SanDisk Corporation, to serve as senior vice president of non-volatile engineering at Micron. Subsequently, Mehrotra hired Sumit Sadana, SanDisk's chief strategy officer and head of enterprise solutions, as chief commercial officer. Obviously, Mehrotra plans to strategically adjust Micron’s four major businesses (computing and networking, storage, mobile and embedded) in accordance with market trends and customer needs.
Mehrotra also hired Anand Jayapalan, vice president of memory solutions at SanDisk, to be responsible for Micron's solid-state storage business and expand the business in large market areas including cloud, enterprise and client computing.
Some analysts believe that the former SanDisk team is likely to promote Micron's SSD (solid-state drive) business and accelerate the development of QuantX products based on 3D XPoint technology. Micron worked with Intel to develop 3D XPoint, and while Intel launched the first products based on the technology under the Optane brand, Micron is still developing products.
Some analysts believe that Micron brought orders to Sanjay Mehrotra because he played an important role in WDC's acquisition of SanDisk. However, there don't appear to be any acquisitions in sight in the near future.
Micron's priorities under new management
Micron Technology's management has four new hires from SanDisk, the SSD market leader that was acquired by Western Digital (WDC) in mid-2016.
As the new CEO of Micron, Sanjay Mehrotra listed the priorities for the next few quarters in the third quarter financial report and KeyBanc Global Technology Leadership Forum. Mehrotra said he will focus on two areas: improving cost competitiveness and adding value-added solutions to the product portfolio.
Micron will likely continue to develop cost-effective products and accelerate their mass production to gain greater cost advantages over competitors. Over the past 12 months (as of 3Q17), Micron has reduced costs in its DRAM and NAND businesses by 25% and 30%.
Micron also plans to focus on value-added solutions by increasing its portfolio of system-level solutions. It hopes to develop different solutions by enhancing the functionality of controllers, firmware and software.
When it comes to DRAM, Micron is likely to focus on delivering high-performance, low-latency memory, as well as storage systems that address the needs of artificial intelligence to access, process, analyze and infer data faster. On the NAND side, it will likely focus on SSD hybrids.
Since Micron has advanced technologies in DRAM and NAND, Mehrotra seems to be opening up opportunities for MCP (multi-chip package) solutions, especially in the mobile space.
All of this raises the question of how Micron plans to execute on these priorities. Mehrotra said Micron will work with leading companies in the ecosystem to develop value-added solutions. It has established a memory chip research center in the United States to design specialized memory products for automobiles and artificial intelligence and develop new manufacturing processes for its global factories.
Although the new research center doubles the scale of Micron's R&D, it is still lower than Samsung.
Can Micron's strong revenue growth continue into the fourth quarter of 2017?
Micron Technology is focused on reducing costs and adding value-added solutions to its product portfolio to capitalize on the current upward trend in the memory market. Micron generates 64% of its revenue from DRAM and 31% from NAND. It serves four major end markets: computing and networking, storage, mobile, and embedded.
Supply shortages in the DRAM market have caused DRAM prices to surge, driving up Micron's overall revenue over the past four quarters. In addition, Micron began mass production of 3D NAND when the NAND market was in short supply, which accelerated Micron's revenue growth in the past two quarters.
In the third quarter of 2017, Micron's revenue increased 20% to $5.6 billion, driven by a 14% increase in DRAM ASPs and a 17% increase in NAND bits. Micron reported that all four major end markets have experienced sequential revenue growth, with the largest growth (27%) coming from the memory market.
Due to the increase in DRAM prices, the increase in DRAM and NAND product digits, and the increase in product structure, Micron's revenue increased by 92% year-on-year. SSD revenue tripled in the 12 months to May 2017. Micron has also increased the proportion of high-value DRAM solutions in its portfolio for enterprise, cloud and graphics customers.
In the third quarter of 2017, Micron's computing and network revenue and mobile revenue more than doubled year-on-year. The company is currently focusing on its storage business as more and more data centers adopt artificial intelligence.
Micron's quarterly revenue grew faster than Samsung's memory, which grew 15%. SK Hynix grew 6% and Intel's memory grew 1%. In terms of year-on-year revenue, Micron's revenue grew the highest, reaching 92%, while Samsung, SK Hynix, and Intel's revenue increased by 65%, 70%, and 58% respectively.
For the fourth quarter of 2017 (end of August 2017), Micron expects revenue to be between US$5.7 billion and US$6.1 billion, higher than the forecast of US$5.62 billion.
Mizuho Securities analyst Vijay Rakesh expects Micron's earnings to be at the high end of his forecast, or even exceed estimates. Rakesh said that DRAM contract prices increased by 5% - 6% from June 2017 to June 2017, while NAND prices increased by 2% - 5% during the same time period. This pricing increase could increase Micron's revenue by 5%, even if the number of units does not increase.
However, Q4 2017 is a seasonally strong quarter and bits will show normal seasonal growth of 10%-11%, while Micron's transition to 1x DRAM and 64-bit NAND has increased bit output . Both factors are likely to increase sales, and higher volumes and prices could push Micron's revenue to over $6 billion in Q4 2017. Why is
optimistic about Micron’s DRAM market prospects?
Micron expects DRAM demand to grow at an average annual growth rate of 20% from 2016 to 2020 due to the increasing number of devices and the amount of memory in each device.
In addition, technology trends in artificial intelligence, VR and big data storage and analysis are driving demand for professional DRAM. Micron is a company well-positioned to capitalize on this changing trend, as its specialty DRAM products are already used by the likes of Nvidia and Intel.
Micron expects the DRAM industry’s bit supply to grow between 15% and 20% in 2017. Micron's DRAM production in the second half of 2017 should be about 10% higher than in the first half. For 2018, Baird analyst Tristan Gerra expects Micron to increase its 1X DRAM production to increase the company's DRAM market share.
Micron hopes that industry DRAM demand will grow faster than supply and average selling prices. According to DRAMeXchange, DRAM spot prices rose 78% year-on-year in the first half of 2017, averaging $2.97, about 30% lower than the five-year high.
As demand for DRAM remains strong, there is still room for DRAM prices to rise. In addition, memory manufacturers with strong profits are not eager to increase production to seize market share. This further supports higher DRAM ASP.
DRAMeXchange expects DRAM trading prices to remain strong in 2017. Cleveland Research noted that Samsung plans to increase mobile DRAM prices by 10%-20% in the fourth quarter of 2017, in response to the research firm's estimate that tight DRAM supply will continue into the first half of 2018. Samsung's decision to raise DRAM prices confirms Micron's strong DRAM price estimates.
How does Micron benefit from the favorable DRAM market environment?
Micron Technology is the world's third-largest DRAM manufacturer, behind Samsung and SK Hynix. Micron generates 64% of its total revenue from DRAM.
According to data from DRAMeXchange, Micron's DRAM market share increased from 21% in the first quarter of 2017 to 21.6% in the second quarter of 2017, occupying SK Hynix's market share.
In the third quarter of 2017, Micron's DRAM revenue increased 19.6% to $3.6 billion as DRAM ASP increased by 14% and bit shipments increased by 5%. Industry data shows that demand and prices are still rising, and this trend is likely to continue into the fourth quarter of 2017.
Micron's DRAM non-GAAP gross margin increased to 54% in Q3 2017 from 44% in Q2 2017 as Micron lowered its costs by 6% and improved its products combination.
In the third quarter of 2017, Micron's revenue increased by 20%, driven by strong demand for servers, which partially offset the impact of weak demand in the PC and mobile markets. Demand for specialized DRAM used in networking, graphics, automotive and other embedded technologies is stable.
According to DRAMeXchange, PC and server DRAM ASPs rose more than 10% in the second quarter of 2017 from the previous quarter, while mobile DRAM ASPs rose less than 5% as some Chinese smartphones Manufacturers have lowered their annual shipment targets.
Citi analyst Christopher Danely said that DRAM trading prices increased in July 2017 as demand from the personal computer and server markets, which account for 50% of total DRAM demand, remained strong.
Baird analyst Tristan Gerra expects PC and server demand to stabilize in the third quarter of 2017, but the latest data shows that PC and data center OEMs are facing strong demand for laptops and double-digit growth in data center memory. DRAM inventories were below normal levels as of Q3 2017. Gerra expects low inventory levels to continue into the first half of 2018, driving DRAM prices.
DRAM prices may rise because Micron's Taiwanese DRAM subsidiary Inotera, which makes Apple mobile DRAM, temporarily closed one of its manufacturing plants due to technical glitches with the equipment.
DRAMeXchange estimates that global DRAM production capacity will be reduced by 5.5% in July 2017 due to temporary shutdowns and capacity losses caused by the incident. At a time when seasonal demand picks up, this capacity loss could keep supply tight and prices high.
How Micron's NAND earnings reflect its early 3D transition
Micron Technology is seeing significant growth in the DRAM market, but is also seeing strong momentum in the NAND market as Micron's early transition to 3D NAND begins to pay off. .
NAND is a solid-state flash memory that is faster, smaller, and more energy-efficient than a hard drive. It can store data even when the device is turned off. As a result, its use is increasing – especially on smartphones. But while demand for NAND is strong, its supply is constrained because major NAND manufacturers are transitioning to 3D technology and they have had to temporarily stop producing NAND products.
Micron generates 31% of its total revenue from NAND. According to data from DRAMeXchange, Micron increased its NAND market share from 11.5% in Q1 2017 to 12.9% in Q2 2017, taking market share from SK Hynix and Toshiba that have not yet put 3D NAND products into use.
In the third quarter of 2017, Micron's NAND revenue rose 23.6% quarter-on-quarter to $1.7 billion, while the average selling price of NAND increased by 3% and bit shipments increased by 17%.This trend is likely to continue into Q4 2017, as some industry data suggests demand and prices are growing.
Micron's NAND revenue grew faster than Samsung and Western Digital, which posted quarterly revenue growth of 11.6% and 8.6% respectively.
Micron NAND's non-GAAP gross margin increased from 31% in the second quarter of 2017 to 41% in the third quarter as the company reduced costs by 12% and improved its product mix.
Micron transitioned to 3D NAND earlier than the industry, which helped it gain cost competitiveness. In the past, when Micron made 2D planar NAND, it lagged behind the industry in cost capabilities. However, since Q1 2017, when 3D NAND came online, its bit cost has dropped significantly.
Micron's NAND revenue is driven largely by strong demand for solid-state drives. Demand from mobile, automotive, industrial and other embedded markets declined, while demand from consumer markets increased slightly. Q3 was a seasonally weak quarter for the mobile and consumer markets, which accounted for 60% of Micron's NAND revenue.
Despite seasonal weakness, NAND transaction prices rose 3%-10% quarter-on-quarter in the second quarter of 2017, according to DRAMeXchange. The research firm expects mobile NAND and SSD transaction prices to pick up as seasonal sales pick up. Will rise in Q3 2017.
Micron's estimates for the NAND industry
Micron Technology expects NAND industry supply growth to be between 30%-40%; bit production in the second half of 2017 will be approximately 30% higher than in the first half of 2017. Given the timing of the technology transition, Micron expects its NAND bit production to remain flat in the first half of 2018 and to increase significantly in the second half of 2018.
Micron expects NAND demand to grow by 45.0% from 2016 to 2020. This growth was driven by strong demand from the data center and mobile markets, as well as the adoption of SSDs across enterprise, cloud and customer PCs.
The biggest NAND growth may come from Apple, which is preparing to launch the iPhone 8 in September 2017. The flash memory for Apple's iPhone 7 comes from SK Hynix, and the flash memory for the iPhone 7 Plus comes from Toshiba. However, both suppliers are currently facing supply issues, and Apple may delay the release of the iPhone 8. This may prompt Apple to purchase NAND from Micron.
In Apple's third quarter 2017 financial report, Apple cut its fourth quarter gross profit margin by 50 basis points due to high-end product transformation costs and memory pricing difficulties. This suggests that consumers expect NAND supply shortages in the second half of 2017, driving up prices.
Apple is a major consumer of DRAM and NAND chips. Many analysts believe that acquiring Micron would make Apple better off.
Apple's NAND suppliers have been plagued by several issues. Samsung has been locked in a patent lawsuit with Apple, while Toshiba is in litigation with its NAND partner Western Digital, which has delayed its 3D NAND production. At the same time, SK Hynix lags behind the industry in NAND technology.
But there is no lawsuit from Micron, which has the most advanced and cost-effective 3D NAND technology in the industry. One possibility is that Apple forms a joint venture with Micron to build a memory factory specifically to meet its needs. This ensures a normal supply of memory.
Another possibility is that Apple acquires Micron. Apple uses NAND and DRAM in nearly all of its products, including iPads, Mac laptops, iPhones and smartwatches. The phone maker likes to have complete control over hardware and software, and acquiring Micron would likely provide that. In addition, Apple can also use Micron's expertise to develop a new type of memory for artificial intelligence products.
Micron joins AMD and Nvidia as top semiconductor stocks
Over the past 12 months, Nvidia, AMD, and Micron have topped the list of semiconductor stocks, with gains of 166%, 61%, and 84% respectively. WDC stock has gained 92% during that time, and all of the stocks mentioned above have outperformed the S&P 500, which has gained 12% during the same time frame.
Micron shares are up 38% since the start of 2017, outperforming WDC stock, which is up 30% year to date.Micron stock has outpaced WDC stock as the latter filed a lawsuit against its NAND partner Toshiba, creating uncertainty in its 3D NAND production.
Micron's stock price reached a 52-week high of $32.96 on June 7, 2017, when Micron reported better-than-expected third-quarter results and guidance. However, the impact did not last long and the stock began to decline, falling 15.4% in two months to $27.5 by August 10, 2017.
Even tech giants Nvidia and AMD suffered declines in the first 10 days of August 2017, but the semiconductor industry has since rebounded. Between August 10 and August 28, Micron’s stock price rose 13%. Investors who ignored the restlessness and didn't sell during the decline saw gains.
Micron stock is fundamentally strong, with high earnings and high cash flow. However, there has been a lot of negative noise at the peak of the memory market, which has kept investors cautious and acted as a headwind to prevent Micron stock from breaking above $32.
Micron stock was just over $36 during the last memory cycle in 2016, so it's safe to assume that if strong memory demand and prices continue in 2017, the stock could reach $36.
Institutional investors have reacted to the recent volatility in Micron stock. According to DigiTimes, in August 2017, Nanya Technology sold approximately 1.16 million Micron shares for $35.52 million. The company still holds a 3.97% stake in Micron.
On the other hand, hedge fund manager David Tepper of Appaloosa Management bought 6.7 million shares of Micron stock and 1.3 million shares of WDC stock.
How will Micron's stock price trend in the short term?
Micron's stock has increased 84% over the past 12 months, making it one of the top names in the semiconductor industry. This strong share price momentum peaked at $32 as the negative impact of the industry peak prevented investors from boosting the stock price.
In terms of technical analysis, short-term and long-term MA (Moving Average) play a key role. When the short-term MA is higher than the long-term MA, the company shows its good technical strength, indicating good investor confidence.
Micron, WDC, and Intel all see that their 50-day and 100-day MAs remain unchanged, indicating that their stock prices are not moving much in the short term. However, the 20-day MAs for Micron and WDC are $29 and $84, respectively, which are lower than the 50-day MAs of $30 and $88, respectively, indicating that investors are very cautious.
Another way to look at a moving average is to compare it to the current stock price. If the current stock price is higher than the short-term stock price, it indicates that the stock price is in an upward trend, generating a buy signal. However, if the stock price falls to the long-term MA, it indicates a downtrend and generates a sell signal.
Micron and WDC are currently trading above their 20-day and 100-day MAs, suggesting a return to growth after a brief period of pessimism.
RSI (relative strength index) measures the strength of investor sentiment on a scale of 0-100, with less than 30 indicating that a stock is oversold and greater than 70 indicating that a stock is overbought.
Micron’s RSI grew from 53 in June 2017 to 62 in August 2017, indicating that significant buying activity is occurring in Micron stock. At over $31.0, Micron stock is close to being overbought, which reduces the likelihood of a higher stock price in the near term. WDC is already in overbought territory and the RSI is at 73.
The above two indicators suggest that Micron's stock price may hover between $30-$32, as the stock price growth over the past 20 days has made the stock close to overbought. When a stock is overbought, its upside potential is further reduced—unless there are significant tailwinds.
Why some Micron analysts are so bullish
Micron Technology is a fundamentally undervalued stock thanks to its share price growth of over $30. Investors view the earnings boost as a one-time event and worry about a potential increase in production capacity, which would ease supply shortages and lower memory prices, taking away profit and revenue growth from favorable pricing.
Wall Street analysts, however, are optimistic about Micron and have issued a blanket "buy" recommendation on the stock. They are also optimistic about WDC, but are divided on Intel.
Several financial bloggers said that Micron is focusing its products on fast-growing markets. It appears to be shifting its DRAM portfolio toward server DRAM and specialized DRAM for graphics and networking. These are high-margin markets and demand growth is just beginning. Micron is also concentrating its NAND product portfolio into solid-state drives and automotive and industrial segments.
So even as the commoditized memory market faces a slowdown, Micron's shift to specialty memory could serve as a good buffer against the effects of the recession.
Morgan Stanley
Despite increased supply and falling memory prices, Morgan Stanley analyst Joseph Moore believes the stock price may move higher, setting a price target of $36 for Micron. Moore said that although memory supply shortages are easing, major computing and cloud customers expect supply conditions to remain tight in 2017.
It is worth noting that Apple management stated in its third-quarter financial report that gross profit margin is expected to decline in the next quarter due to the deterioration of the memory pricing environment.
Moore also pointed out that cloud companies expect memory supply to remain tight into 2018, and he expects Micron stock prices to continue growing until the end of 2017 and then return to average levels in 2018.
Steifo
Steifo analyst Kevin Cassidy is optimistic about Micron and believes that the company has great potential in the data center market. Cassidy noted that as the data center world shifts from "CPU-centric systems to data-centric systems," memory requirements per device increase. Therefore, the demand for memory will exceed the demand for microprocessors.
Cassidy also said that Micron has technical and cost advantages in 3D NAND, which can help it develop data-centric systems. Therefore, he believes Micron can grow faster than microprocessor companies such as Intel and AMD.
Behind Micron Analyst Price Targets
Analysts calculate stock price targets by applying price ratios to estimates of the company's revenue and cash flow over the next few quarters. Analysts can use price-to-earnings, price-to-price, or price-to-free cash flow multiples, depending on the company, and they tend to change their price targets frequently based on a company's recent events.
Wall Street analysts raised their consensus price target for Micron Technology to $40 in August 2017 from $38 in June 2017. However, the bullish price target increased significantly from $60 in June 2017 to $75 in August 2017. WDC and Intel consensus and bullish price targets remained unchanged in August 2017. Jim Cramer, co-founder of
The Street, said Micron shares are currently capped at $32 as investors believe the company may not be able to sustain its strong earnings. If the stock breaks above that ceiling, it could spark a huge rally, so analysts have significantly increased their bullish price targets.
Another possibility is that Micron's stock price could rise as customers such as HP and Cisco anticipate higher DRAM prices.
Overall, investors appear to be cautious about Micron stock, while analysts are optimistic.
