On Aug 8, 2014, we issued an updated research report on Micron Technology (MU - Analyst Report) which offers both DRAM and NAND products. DRAM chips are a key component in PCs, while NAND flash chips are critical to portable electronic devices. We remain encouraged by the favorable conditions in the memory market due to fewer suppliers, limited new wafer capacity, differentiated products and diversified customer base which are expected to boost Micron’s prospects.
Micron expects industry NAND bit demand to grow at a CAGR of 38% over the 2014-2018 period, while the supply is expected to grow at a CAGR of 31% over the same time frame. We also remain positive on Micron’s expectation of 25% CAGR increase in DRAM demand over the 2014-2018 period, while supply is expected to grow at a CAGR of 21% during the same period, which will support prices and improve margins.
Micron also has a prudent acquisition strategy. The company added Apple Inc. (AAPL - Analyst Report) to its customer roster through the Elpida acquisition, now known as Micron Memory Japan, which should continue to drive growth. Additionally, Micron’s other acquisitions, such as Rexchip Electronics Corporation, now known as Micron Memory Taiwan Co., Ltd., and the ownership interests in Inotera and Tera Probe, Inc. will boost its mobile DRAM offerings and wafer testing and probe services.
Also, the company has a strong cash flow generating ability which helps it to make strategic acquisitions and invest in new products. Micron’s cash flow from operations increased from $1.09 billion (on May 30, 2013) to $4.35 billion (on May 29, 2014).
However, Micron faces competition from Samsung Electronics Co., Ltd., SanDisk Corporation , SK Hynix Inc., and Toshiba Corporation in the semiconductor memory market. Notably, wafer capacity increases from its competitors could disrupt DRAM and NAND supply dynamics affecting prices and the company’s results.
Micron’s business model is exposed to the same cyclical factors, which are typical of the semiconductor market. Therefore, if the company misses a product cycle, it could result in market share losses, as competitors capitalize on such opportunities. In addition, higher capital requirements and a complex production process may delay product rollouts.
Nonetheless, we are encouraged by Micron’s strong third-quarter fiscal 2014 results. The results were primarily boosted by higher revenues and an improving PC DRAM pricing environment. Moreover, Micron provided modest guidance for the forthcoming quarter.
The company is also optimistic about supply/demand balance for DRAM and NAND memory chips in 2014, which should support prices. Micron is also positive about its product launches and growing demand for its products, particularly SSD products.
Currently, Micron has a Zacks Rank #2 (Buy). Other than Micron, investors may also consider NVIDIA Corp. (NVDA - Analyst Report) with the same Zacks Rank.