Company Overview: Micron Technology, Inc. (NASDAQ: MU) is involved in manufacturing, producing, and selling computer memory and computer data storage, which includes dynamic random-access memory, USB flash drives and flash memory. Headquartered in Boise, Idaho, USA, the company’s solutions are utilized in top-edge computing, networking, consumer, and mobile products. The company is backed by 40 years of technology leadership, and conducts its work in 18 countries, with 13 manufacturing sites and 13 customer labs across the world.

MU Details

Robust Memory Chip Demand Remains a Key Catalysts: Micron Technology, Inc. (NASDAQ: MU) is the 4th largest semiconductor company in the world. MU is engaged in manufacturing and selling high-performance memory and storage technologies, which incorporates Dynamic Random-Access Memory (DRAM), NOR Flash, 3D XPoint memory, NAND flash memory, and other know-how. The company’s major portion of revenues comes from DRAM sales. Micron’s mission and vision are to be the most effective and innovative worldwide provider of semiconductor memory solutions.  Talking about 2019, Micron reported revenues of $23.4 billion. The company operates under four reportable segments, namely Compute and Networking Business Unit (CNBU), Mobile Business Unit (MBU), Storage Business Unit (SBU) and Embedded Business Unit (EBU).

Led by coronavirus outbreak, there has been an extensive interruption in the supply chain and spending pattern across major industries.  Nevertheless, the semiconductor industry has been strong enough during these difficult times. Rising propagation of advanced technologies which includes machine learning capabilities, artificial intelligence, AR/VR, cloud computing, IoT, 5G and blockchain has profited the semiconductor stocks amid Huawei ban and the ongoing pandemic.

This is apparent from the robust performance delivered by Micron. The company’s 3QFY20 results were primarily driven by solid memory chip demand. Moreover, Micron’s positive outlook for the 4QFY20 remains encouraging. It is worth noting that the semiconductor companies are likely to have gained substantially on COVID-19 stimulated social distancing measures, as work from home trend continues. This has led to an increase in demand for hardware on the back of the growing adoption of cloud services. Further, growing demand for server solid state drives (SSD) in datacenters, which has been driving growth in the NAND market, has been a key growth driver for Micron.

Furthermore, accelerating deployment of 5G, driven by increasing demand for ultrafast Internet connectivity, rising demand for desktops, notebooks, and enterprise laptops as a result of the growing trend of work-from-home are key positives for the company. In order to meet these increasing demand, data-center operators had to boost their capabilities to adapt the demand spike for cloud services. In this current scenario, it will be prudent to say that MU, being a semiconductor behemoth for providing design and other components for chip-making, are expected to benefit in the near term.

Historical Performance (Source: Company Reports)

Going forward, the company is set to gain from the resurgence for DRAM demand, along with progress in customer inventory adjustments in the cloud, graphics, and personal computer markets. Over a period of FY15-FY19, the company saw a CAGR of 9.6% and 21.5% in revenue and net income, respectively. Micron Technology, Inc. remains focused on enhancing its overall cost structure and raising the mix of high-value solutions in its portfolio. This, in turn, can lead to high margins in the near term. Long-term debt also decreased from $6.2 billion in FY15 to $4.5 billion in FY19, portraying a decent financial position.

Q3FY20 Key Highlights for the Period Ended May 28, 2020: During the quarter, the company reported non-GAAP earnings per share of 82 cents and revenues of $5.44 billion. Micron’s revenues were in line with the top-end of the company’s guided range of $5.2-$5.4 billion, despite the COVID-19 led pandemic. Also, the top-line increased ~13.6% year over year. This depicts the company's initiatives to stay afloat amid the outbreak of COVID-19 led uncertainties, remain promising.  The company’s president and CEO stated that MU stood strong to the outbreak of COVID-19 led uncertainties. Micron stated that the work-and-learn-from-home requirement is encouraging demand for cloud storage.

The company’s DRAM revenues stood at $3.59 billion, up 5.6% year over year and 16.3% sequentially. DRAM revenues accounted for ~66% of total revenues in 3QFY20. Also, in 3QFY20, the company recorded ~10% increase in bit shipment volumes, on a sequential basis. Revenues from NAND (31% of total revenues) increased by 50.8% on pcp and 10% on a sequential basis and came in at $1.67 billion. NAND ASP increased in the upper single-digit percentage range sequentially.

3QFY20 Key Highlights (Source: Company Reports)

Business units wise, CNBU consists of DRAM and NOR Flash products and increased 7% year over year and 13% sequentially and stood at $2.22 billion. MBU includes Micron’s discrete DRAM, discrete NAND, and managed NAND products. This segment reported revenues of $1.53 billion in 3QFY20 which increased 30% year over year and 21% sequentially. SBU and EBU units reported revenue of $1.01 billion and $675 million, respectively during the quarter.

Business Unit Highlights (Source: Company Reports)

Operating Highlights: During the quarter, gross profit on non-GAAP basis came in at $1.8 billion, down 4.2% year over year, but up 29% from the previous quarter. Sequential growth in gross profit was due to rising pricing at both DRAM and NAND and favourable product mix. Non-GAAP operating income stood at $981 million, as compared to $1.11 billion reported in the year-ago period.

Balance Sheet & Cash Flow Highlight:  The company exited the quarter with a cash balance of $8.66 billion, as compared to $7.5 billion recorded at the previous quarter-end. Long-term debt stood at $6.36 billion, up from $5.2 billion recorded at the end of the previous quarter. During the quarter, operating cash flow stood at $2 billion, whereas, adjusted free cash flow came in at $101 million. Micron repurchased shares of approximately $40 million during the same time span.

Cash Highlight (Source: Company Reports)

Recent News:

1. On July 14, 2020, the company announced a comprehensive Technology Enablement Program to offer early access to technical resources, products, and ecosystem partners. The latest program will assist in the development, designing and qualification of next-generation computing platforms that use DDR5.
2. On June 11, 2020, Micron donated $1 million to support underserved communities, which are affected by the coronavirus led outbreak. The grants will be utilized to aid basic human needs, empowerment and education for disregarded individuals and families.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 35.9% of the total shareholding. The Vanguard Group, Inc. and PRIMECAP Management Company hold the maximum interests in the company at 8.10% and 4.81%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: MU reported May’ 2020 quarter’s gross margin at 32.4%, higher than the Nov’20 gross margin of 26.6%. The EBITDA margin, during May’ FY20, stood in at 42.6%, higher than the industry median of 18.6%. Net margin, in the same time span, stood at 14.7%, higher than the industry median of 7.3%. May’ FY20 debt to equity ratio stood at 0.18x, lower than the industry median of 0.31x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: Low memory prices, a higher mix of lower-margin NAND, along with rising manufacturing cost, are few potential headwinds for the company. Also, underutilization expenses related to the looming procurement of IM Flash Technologies, along with its joint venture with Intel, are expected to weigh on its margins, going forward. Further, the ongoing macroeconomic and trade worries due to the COVID-led outbreak might have a denting effect on the company’s performance. Also, the company also struggles with stiff competition from peers like Intel, SK Hynix, Samsung Electronics, Toshiba Memory and Western Digital Corporation.

Future Expectations and Growth Impetus: Prospects for Micron look encouraging as the company stands to gain from robust demand for memory chips from personal computer manufacturers and data-center operators. For the fourth quarter of fiscal 2020, the company expects revenues to be in the range of $5.75-$6.25 billion. Non-GAAP gross margin is expected to be approximately 35.5% (+/- 150 bps). Micron reckons higher underutilization charges owing to reduced production volumes of $135 million in the quarter to dampen the gross margin in the coming quarter. The company expects non-GAAP operating expenses to be $850 million (+/- $25 million). Earnings per share are expected to be $1.05 (+/- 10 cents).

Guidance for Q4 FY20 (Source: Company Reports)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)

P/CF Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of MU closed at $50.39 with a market capitalization of ~$55.98 billion. The stock made a 52-week low and high of $31.13 and $61.19, respectively, and is currently trading above the average of its 52-week trading range. The stock gave positive returns of ~10.55% and ~5.47% in the last three months and one year, respectively. MU remains on track to benefit from the robust demand for its DRAM and NAND products. Considering the above factors, we have valued the stock using a P/CF multiple based illustrative relative valuation method and arrived at a target price of an upside of lower double-digit (in % terms). For the purpose, we have taken peers like Intel Corp (NASDAQ: INTC), Advanced Micro Devices Inc (NASDAQ: AMD), NVIDIA Corp (NASDAQ: NVDA), to name a few. Hence, we recommend a “Buy” rating on the stock at the closing price of $50.39, up 0.6% on 29 July 2020.

MU Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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