The article was written by Yutian Fang, a Financial Analyst at I Know First and Master of Science in Finance candidate at Brandeis International Business School

“The demand drivers are diverse. They’re secular in nature. Memory has become essential in terms of delivering the value proposition of the end market applications. So, this is what is really driving the overall robust demand drivers for our industry for DRAM. And whether it’s in data centers or in mobile or in graphics or automotive applications, all of these need more memory. And memory is now really enabling higher value as well to the end market applications. So, yes, this all bodes well for the long-term healthy industry fundamentals.” –Sanjay Mehrotra, President and Chief Executive Officer

 Source: warriortradingnews.com

Summary

• Micron holds very competitive positions in both DRAM and NAND markets after series of acquisitions
• The latest quarterly report demonstrated Micron’s strong profitability but the future growth would be impacted by the market demand and pricing dynamics
• The company enjoys outstanding operating efficiency and financial health
• The cyclical risk is still one of the major concerns from market and the stock price need adjustment for the confirmative ascending channel
• Supported by I Know First Algorithm Forecast, currently my recommendation for MU is to hold in the short term

Micron Technology Inc. (NASDAQ: MU) reported strong performance for the third quarter in 2018 on 21^st June. The fourth-quarter forecast was given positively based on a “more consistent and stable supply/demand outlook”. The stock price surged by some 4% in the following day, reaching to the level that peaked after the significant rally ended in March. As a major manufacturer producing memory and storage products that sold to various markets, it continued to benefit from strong demand for semiconductors, creating a total revenue of $7.8 billion in Q3, up 6% sequentially and 40% higher from the same period in the prior year.

Micron still faces threat despite competitive DRAM market positioning

Quarterly share of the global dynamic random-access memory (DRAM) market held by the leading manufacturers, from 2010 to 2018. Source: statista.com

After acquiring Japanese chip vendor Elpida Memory Inc. in 2013, Micron doubled its share in the market for DRAM (dynamic random-access memory). It still faced the dominant market power from Samsung and SK Hynix with a combined percentage of nearly 75. Smaller vendors have been squeezed out in recent years. Micron saw its market share shrink in the second half of last year due to the gas pollution accident in Taiwan, cutting mobile DRAM sales. However, it started to show the largest increase among competitors since the beginning of this year due to new product releases and demand recovery. Mobile DRAM price is forecast to remain stable as supply constrained. The demand is expected to grow as smartphone and mobile device continue to penetrate or upgrade in China and India.

Semiconductor Outperformance vs. S&P 500. Source: Bloomberg

However, the competition has been risen as the major competitors are expanding production capacity and new entrants are having fingers in the pie. In the second half of this year, Samsung’s Pyeongtaek plant will start operation. SK Hynix’s second fab in Wuxi is going to come online that is expected to double the company’s DRAM production capacity. In China’s memory market, potential market entrants are taking shape and gearing up to enter the formative stage. The potential output increase will eventually make the price less favorable. Besides, the memory industry would be very likely to suffer more by fundamental structural impacts. This high-value mobile production is a capital- and time-intensive exercise, so it could be risky even for dominant players to make changes in production plans nearly a year before the actual impact on pricing happens. Nowadays, the trade tensions probably would make the cyclical downturn come at a faster pace. The possible demand-supply dynamics break would tail off the company’s revenue growth.

How to take advantage of the elastic demand in NAND sector remains a question

Quarterly share of NAND Flash memory market held by leading manufacturers from 2010 to 2018. Source: Statista.com

3D XPoint Memory. Source: bgr.com

The NAND is different from DRAM which is a prerequisite as the main memory to PCs, smartphones and mobile devices, NAND (negative AND). As a performance enhancer, NAND helps to increase maximum chip capacity at a lower cost and sees its demand more elastic. As more PC OEMs and servers switched to SSDs while the supply was tight in 2017, the price increased in 2017, making customers hold back demand. The industry NAND demand is expected to grow but the prices are forecast to fall as NAND output is growing further. The major rivals like Toshiba and SK Hynix are increasing their production of 64-layer 3D NAND. The transition from 32 layers to 64 layers brings significant bit growth, making incremental output into oversupply situation as the market is moving towards equilibrium in this year. The possible falling NAND prices would have impact on supplier profitability if the cost reduction is not significant or new market share fails to be gained. In January, Micron’s NAND partnership with Intel was terminated. Micron lost the R&D support from Intel thus increasing expanse. The shift of NAND supply to high-value mobile managed NAND resulted in Micron’s low 3D XPoint sales to Intel. The company’s Storage Business Unit revenue declined by 9% from last quarter. Micron is shifting its focus to high-value memory solutions and accelerating the transition to advanced nodes to reduce production costs.

Strong profitability could be in doubt as the cycle moves on

Micron used its assets more efficiently than the industry average level with the company’s ROA of 25%. The company’s long-term obligations are well covered by the cash and other short-term assets and the interest coverage ratio is 25.7x. The third quarter’s revenue and gross margin demonstrated the company’s strong profitability during the stage of expansion.

Micron financial data. Source: Micron

The operating margins improved by 12 percent to 49 percent compared to the same period of prior year. In terms of its different business units, all sectors achieved record revenue benefited from robust demand. Driven by demand for memory solutions, sales of cloud server and graphics memory products, the Compute and Network Business Unit gained a revenue of $4 billion in the most recent quarter. This sector realized a year-over-year growth of 67 percent and sequential increase of 12%. The Mobile Business Unit rode on the momentum and achieved an operating income of $860 million, up 24.8% quarter-over-quarter. The Embedded Business Unit brought a revenue of $897 million with the year-over-year growth of 28 percent. The revenue from Storage Business Unit, where SSD, NAND components, and 3D XPoint sales were included, declined to $1.1 billion due to the shift in NAND supply. According to the analyst estimates from S&P Global, Micron’s revenue is expected to grow at a growth rate well below the market average. The semiconductors remain susceptible to inventory cycles.

Technical analysis and analyst recommendations

Source: StockTA.com

Micron’s stock price soared at the beginning of March following Nomura Instinet raised its estimates due to the incoming share buyback announcement and expanding margin in the NAND market. The stock peaked at an 18-year high of $63.98. But the price dropped to nearly $45 in April, where the bears strengthened as shown in the MACD and both lines fell to the new bottom although the price was higher than its previous bottom. In May, the stock picked up its climbing again and reached to a new peak due to the market optimism for the company’s Q3 report. However, the declining trade volume couldn’t support the upside momentum. Both MACD lines showed weak peaks and turned down towards 0 line while the price stayed within the narrow band. In the short run, the stock price would probably break out the supporting 50-day EMA. The ascending channel would not be confirmed until the stock price shifts another gear to climb.

Currently, Micron’s PE ratio is 6.7x, which is well below the industry average suggesting the stock price is undervalued. Analysts from Yahoo Finance monitoring this stock are very positive on the stock performance in the future. In June, 28 out of 31 analysts gave the recommendation of strong buy or buy.

Current I Know First Algorithm Forecast for MU

In I Know First Algorithm forecast dated on June 21st, 2018, the signals for all three timeframes are slightly negative. Signals for one month, 3 months and a year are -11.59, -15.13 and -1.22. The predictabilities also gave strong confidence in the forecast, as suggested by the correlation between historical predictions and actual movements. The signal for I Know First’s one year forecast is -1.22. The weakly negative number indicates that the prospect for Micron’s long-term movement would probably not be that bad.

Go here to read how to interpret this diagram.

Past I Know First Forecast Success with MU

On May 4^th , 2018, I Know First Algorithm gave a very strong forecast on Micron. The signals for 1 month, 3 months and 1 year are as high as 29.99, 51.63 and 586.36 respectively. We held a bullish view on the stock based on our analysis on the increasing market demand and product prices rise. During our forecasting period of three month, the stock price rose from $52.03 to $58.95 by 13.30%. The bullish movement was perfectly caught by I Know First’s forecast.

 Stock price movement since I Know First past forecast

Current I Know First subscribers received this MU forecast on March 4^th , 2018. To subscribe today, click here.

Conclusion

The Micron remains its competitive positions in two of its main sectors after series of acquisitions in recent years. However, it still faces the pressure from several market dominant powers. The major market players competed fiercely in technology investment and production expansion. Even though the company saw very significant revenue growth in the most recent quarterly earnings report, we believe the cycle would probably move to next stage. In particular, NAND market would be volatile as the balance between demand and supply broke. The market concerned that the oversupply could come after the most vendors increase their production capacity. The shift to advanced product would make investment into distressed inventory. Micron is putting efforts in developing high-value memory solutions and reducing production costs. Combined with our technical analysis, I take a hold position as the stock price reached to its second peak and the upward momentum was slowing down for the short term. Our analysis is supported by I Know First Algorithm forecast.