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

MU Details
 

  
Micron Rides on Robust Demand of DRAM and NAND Products: Headquartered in Boise, Idaho, USA, Micron Technology, Inc. (NASDAQ: MU) is the 4^th 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. In 2019, the company 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). CNBU consists of DRAM and NOR Flash products and accounted for 43% of the total revenue in FY19. This segment reported revenue of $10 billion in FY19. MBU includes Micron’s discrete DRAM, discrete NAND, and managed NAND products. This segment reported revenues of $6.4 billion in FY19 and accounted for ~28% of total revenue. SBU and EBU units reported revenue of $3.8 billion and $3.1 billion, respectively in FY19.
 
It is worth noting that the worldwide semiconductor industry, which performs a crucial role in the high-growth technology space, has been comparatively less influenced by the coronavirus pandemic. The semiconductor industry is expected to see a positive trend in the days ahead, thanks to the reopening of the economy, bounce back in smartphone sales in markets like China along with increased spending by people on mobile phones. Per World Semiconductor Trade Statistics, worldwide semiconductor sales are likely to increase by 5.9% in 2020 and 6.3% in 2021 on an annual basis. The recent upward demand movement has prompted chip demand from PC manufacturers and data-center operators. Further, as work from home trend continues, demand for hardware continues to grow. There has also been a rise in the demand for cloud storage. 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 Micron, being a semiconductor behemoth, for providing design and other components for chip-making are expected to benefit, in the near term.
 
Looking ahead, 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. The company witnessed a CAGR of 9.6% and 21.5% in revenue and net income, respectively, over the period of FY15-FY19. Micron 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, depicting a sound financial position.  


Historical Financial Performance (Source: Company Reports)
 
Prospects for Micron look encouraging as the company stands to gain from robust demand for memory chips from personal computer manufacturers and datacenter operators. Further, demand for home office equipment also saw a boost on the back of employees working from home, and students being more dependent on desktops and laptops to study from home amid the coronavirus led lockdown.
 
Q2FY20 Key Highlights for the Period Ended February 27, 2020: During the quarter, the company reported non-GAAP earnings per share of 45 cents and revenues of $4.8 billion. Micron’s revenues were in line with the top-end of the company’s guided range of $4.5-$4.8 billion, despite the COVID-19 led pandemic. Although top-line and bottom-line declined year over year, 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 Micron stood strong to the outbreak of COVID-19 led uncertainties. Micron also stated that it has sufficient inventory to stay afloat in the near-term supply-chain disruption. Moreover, Micron stated that Chinese smartphone production volumes have begun to bounce back and two of its factories in Malaysia are now operational and running production on a limited basis.
 
Coming back to quarterly results, the company’s DRAM revenues stood at $3.1 billion, down 26% year over year and 11% sequentially. DRAM revenues accounted for ~64% of total revenues in 2QFY20. However, shipments for bit increased greater than 20% from the prior corresponding period. Average selling price was flat on a quarter over quarter basis.  Revenues from NAND (32% of total revenues) increased 9% on pcp and 6% on a sequential basis and came in at $1.5 billion. NAND ASP increased in the upper single-digit percentage range sequentially, while bit shipment grew ~20% year over year. During the quarter, gross profit on non-GAAP basis came in at $1.4 billion, down 52.3% year over year, primarily due to underutilization charges at the Lehi Lab. Non-GAAP operating income stood at $542 million, as compared to $2.1 billion reported in the year-ago period.
  

2QFY20 Key Highlights (Source: Company Reports)
 
Balance Sheet & Cash Flow Highlight:  The company exited the reported quarter with cash and short-term investments of $7.5 billion, down from $7.6 billion recorded at the end of the previous quarter. Long-term debt stood at $5.2 billion and remained flat on a sequential basis. During the quarter, operating cash flow stood at $2 billion, whereas, adjusted free cash flow came in at $63 million. Micron repurchased shares of approximately $44 million during the same time span.
 

Cash Flow Highlight (Source: Company Reports)
 
Recent News:

1. On June 4, 2020, the company announced the UV Robot Design Challenge to tackle the increasing demand for reliable, low-cost ultraviolet (UV) light robotic solutions that can assist automate sterilization and potentially curb the spread of COVID-19 and other diseases.

2. On May 12, 2020, the company stated its latest client solid-state drives (SSDs) that bring NVMe™ performance to client computing applications, freeing laptops, workstations, and other portables.

3. In another update, the company also added new features and capabilities to the 5210 ION enterprise SATA SSD, which consisted of the VMware vSAN certification, new 960GB SKU and QLC custom firmware to reduce QLC durability worries and workload constraints.

 
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 8.1% and 4.81%, respectively.

 
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
 
Key Metrics: MU reported Feb’ 2020 quarter’s gross margin at 28.2%, higher than the Nov’20 gross margin of 26.6%. The EBITDA margin, during Feb’ FY20, stood in at 37.8%, higher than the industry median of 18.3%. Net margin, in the same time span, stood at 8.5%, higher than the industry median of 6.9%. Feb’ FY20 debt to equity ratio stood at 0.15x, lower than the industry median of 0.32x.

 
Key Metrics (Source: Refinitiv, Thomson Reuters)
 
Risk Analysis: The ongoing macroeconomic and trade worries due to the COVID-led outbreak might have a denting effect on the company’s performance, going forward. Further, on the back of oversupply in the memory chip market, Micron has been seeing declining memory prices in recent times. Further, the company also struggles with stiff competition from peers like Intel, SK Hynix, Samsung Electronics, Toshiba Memory and Western Digital Corporation.
 
Outlook: The company is seeing robust progress in customer inventory adjustments in most of its end-markets. This is expected to have an encouraging impact on bit demand for DRAM, going forward. Further, higher demand from DRAM bit shipments for the gaming consoles, cloud, graphics, and automotive application markets is projected to be a tailwind in the near-term. It is worth mentioning that, that Micron stands to benefit from robust demand from datacenter due to remote-work economy, increased gaming, and e-commerce activity.
 
For the third quarter of fiscal 2020, the company expects revenues to be in the range of $4.6¬-$5.2 billion. Non-GAAP gross margin is expected to be approximately 31% (+/- 150 bps). The company expects non-GAAP operating expenses to be $825 million (+/- $25 million). Earnings per share are expected to be 55 cents (+/- 15 cents).
 

Guidance for Q3 FY20 (Source: Company Reports)
 
 
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
 

P/E 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 $52.47 with a market capitalization of ~$58.4 billion. The stock made a 52-week low and high of $31.13 and $61.19 and is currently trading above the average of its 52-week trading range. The stock gave positive returns of ~15.62% and ~56.37% 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 with an upside of lower double-digit (in % terms). For the purpose, we have taken peers like Intel Corp (NASDAQ: INTC), Western Digital Corp (NYSE: WDC), NVIDIA Corp (NASDAQ: NVDA), to name a few. Hence, we recommend a “Buy” rating on the stock at the closing price of $52.47, down 1.28% on 10 June 2020.


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

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