b7b18088-7198-48b2-93e0-6d2a7967e43d_Micron-Premium-Research.pdf
Micron: Premium Research
Micron Overview:
Our goal is to catch Micron for the 2021 rebound which is likely delayed a year from the anticipated 2020 rebound. This rebound should occur when high-end smartphones are released again and the automotive market comes back to help drive demand in embedded DRAM. Mobile and automotive are the hardest hit segments in 2020. Data center segment remains strong.
Due to the cyclical nature of memory and storage, Micron is likely to become a 1-2 year holding rather than a permanent buy-and-hold.
Product:
Micron is the only company in the world with a portfolio of DRAM, NAND, and 3D XPoint technologies. X100 is the fastest storage device in the world. The company has also entered into a new 3D XPoint wafer sale agreement with Intel that replaces the previous agreements.
In the most recent fiscal year, DRAM comprised two-thirds of Micron’s revenue and NAND one-third of revenue.
NAND memory saves data even when the power is removed, such as when a cell phone is turned off. DRAM only saves memory when a device has power but is much faster than NAND and lasts longer. Beyond mobile devices, NAND is found in traffic lights, digital advertising panels/displays, and anything with artificial intelligence that needs to store data.
As covered in the Lam Research report, NAND has been around since the 1980s but got a much-needed boost from 3D NAND, which stacks vertical chips. Historically, Micron focused on DRAM for PCs and servers an expanded into NAND over the past ten years.
One risk to Micron is the thin moat as competitors Samsung and SK Hynix outpace Micron in total memory/storage shipments. With little differentiation, these companies have pricing wars with Samsung generally considered the industry leader. Toshiba and Western Digital (SanDisk) are also competitors.
This is one reason Micron continues to invest in R&D in products such as 128-layer 3D NAND, 3D XPoint and also 1Z-nanometer DRAM.
“The Memory Guy” Jim Handy has a great write-up describing how Micron has improved its profitability in the DRAM market. His analysis points towards Micron holding a leadership position in 1Znm production over Samsung and Hynix. The new DRAM was introduced at CES and is geared towards the server and hyperscale markets.
One of the bull cases for Micron right now is DRAM and NAND pricing, which is high due to low inventory and previous capex cuts. There is low supply right now regardless of contracting demand. Prior to Covid-19, the market believed pricing had bottomed in 2019.
Micron is one of the most volatile semiconductor stocks with lows around $10 in 2016 and highs around $60 in 2018. Regarding valuation, the stock is trading at double its current PE ratio as 2019 and similar forward PE ratio as 2019. The issue here is any data center strength may not be able to offset the weakness in the mobile and automotive segment.
Historically, buying Micron at a price-to-book value of 1 has done well. The stock is currently trading at a price-tobook of 1.439.
Micron Financials:
In the most recent quarter ending in February, Micron’s revenue beat estimates yet fell 18% year-over-year to $4.80 billion. Revenue was down 7% from $5.14 billion quarter-over-quarter. TTM revenue was $19.6 billion with non-GAAP net income of $2.9 billion, or $2.54 EPS.
DRAM sales were down 11% sequentially and NAND sales were up 6% sequentially. DRAM was impacted by flat sales prices and lower bit shipments.
Earnings were also down YoY with Micron reporting GAAP net income of $405 million, or $0.36 EPS, compared to $1.62 billion, or $1.42 EPS in the year-ago quarter and $0.45 EPS last quarter. Non-GAAP income of $517 million or $0.45 per share beat estimates by $0.08 compared to $1.71 EPS.
Capital expenditures were $1.94 billion in Q2 2020. Management expects FY 2020 capex to be $7 to $8 billion. For fiscal Q2 ending in February, the company had cash and investments of $8.12 billion with a net cash position of $2.7 billion. The company has about $5 billion in long term debt. Recently, Micron drew on a $2.5 billion revolver to have cash on hand.
Margins are decreasing with gross margins of 28% in Q2 2020 compared to 49% in Q2 2019. Operating margins were at 9.2% in the most recent quarter compared to 33.5% in the year-ago quarter.
The median forecast for FY 2020 ending in August is $20.11 billion, down 14.7% year-over-year.
The median forecast for FY 2021 is $24.49 billion, up 21.74% year-over-year. Forward estimates for EPS of $4.90 for FY 2021 will represent an increase of 124% YoY.
QLC SSD bit shipments rose 60% sequentially in the 2Q FY2020. The company expects QLC SSD to grow in the 2H 2020.
The company began to deliver LP5 mobile DRAM products to customers including Xiaomi, which is using LP5 in its 5G-capable Mi smartphones in 8GB and 12GM configurations.
In the graphics market, GDDR6 bit shipments increased more than 40% q-o-q. In the new gaming consoles the company will deploy SSD’s in place of hard drives for the first time.
Effects of Covid-19:
Micron is more exposed than other semiconductors to consumer spending.
About 15% of Micron’s revenue comes from China, where there was weaker sell-through of consumer electronics and factory shutdowns in the fiscal second quarter ending in February. According to the most recent earnings call, some of this was offset by stronger data center demand due to increased gaming, e-commerce, and remote-work. Management expects this trend to continue globally.
Due to Covid-19, Micron expects to see lower demand for smartphones, consumer electronics, and automobiles than prior expectations. Anticipating changes to customer demand, Micron is moving supply from smartphones to service the strength in the data center markets for both DRAM and SSDs.
Some equipment companies have also indicated delays in equipment deliveries due to the impact of various government actions to combat COVID-19.
The Malaysian government issued lockdown orders on March 16 and Micron closed the manufacturing plants in Muar and Penang. Later, the Malaysian government declared semiconductor production as essential and after a few days the production resumed on a limited basis. In the earnings call, the company stated it’s using its global supply chain to mitigate production impact.
For the most part, analysts are cutting their forecasts for Micron, primarily due to Covid-19. Goldman Sachs, Piper Sandler, KeyBanc and Morgan Stanley have all lowered price targets.
Revenue Segments & Addressable Market:
Micron’s business composition is 64% DRAM, 32% NAND and 4% 3D XPoint memory.
Micron has four business units, which are reportable segments:
• Compute and Networking Business Unit (CNBU) — 41%
• Mobile Business Unit (MBU) — 26%,
• Storage Business Unit (SBU) — 18%
• Embedded Business Unit (EBU) — 15%
Micron has the following revenue segments. According to recent earnings reports from various semiconductor companies, mobile and automotive are exposed.
• Mobile — 25%
• Client and Graphics — 20%
• Enterprise and Cloud Server — 20%
• SSDs and other storage — 15%
• Automotive, Industrial and Consumer — 15%
Country 2019 Revenue in US$ Mil %
- United States 12,451 53
- Mainland China excl Hong Kong 3595 15
- Taiwan 2,703 12
- Hong Kong 1,614 7
- Other Asia Pacific 1,032 4
- Japan 958 4
- Other 1,053 4
- 23,406 100
One of Micron’s strongest selling points is the addressable market of $83 billion for DRAM and $99 billion for 3D NAND by 2025. This is a combined addressable market of $182 billion.
Source: Micron Presentation
Future catalysts for NAND and DRAM include artificial intelligence and autonomous vehicles requiring data storage and memory capacities. In the long-term, the management believes it will benefit from secular growth in the industrial IoT market as 5G rolls out. Current markets include the data center and internet of things in addition to PCs and mobile smartphones
According to TrendForce, YMTC, a new competitor located in Wuhan, China, is set to compete with 128L products by the end of the year.
Technical Analysis
The above chart is a look at the weekly price pattern of Micron (MU). The larger the trend, the more important it is to the direction of the price. Since 2009, Micron has been trading within a leading diagonal pattern. This is a 5wave pattern that tracks along a trend channel (in gray). Each of the larger degree 5 waves (in red) are comprised of 3-waves (in blue).
According to this pattern, we are in the larger degree 4th wave (in red). Within this wave, we have completed the A and B wave. Therefore, we are in the middle of the final C-wave down. I will target the lower end of the trend channel, which we have not touched. There are a cluster of Fibonacci price levels around the trend channel between $34-$22.
The weekly RSI is also confirming that we are not yet in a renewed uptrend for MU. Until the RSI can break above the downward sloping trend line as well as break above 60, the momentum suggests the current uptrend off the March lows is a corrective move in a larger degree trend, which is pointing down.
It would be rare to see this larger degree pattern not follow the current trend. However, if price can break above the $61 level, which is confirmed by the weekly RSI, I will look at that level as a bullish move and a targeted entry to ride the new bull market in MU.
The daily chart shows this trend unfolding in real time. The uptrend’s structure off the March lows is overlapping and symmetrical. It further suggests weakness. This is also confirmed by the internals.
The volume is slowing down at current levels, suggesting that the participation at current prices is weakening. The Accumulation/Distribution line suggests that the smart money has not been buying into this uptrend, and in fact using it to unload shares. The MACD histogram and the MFI are showing notable weakness below the price as well.
All of this together further supports a topping pattern that is unfolding. If price can break below $41, this will confirm the target entries below.