Company Overview: Micron Technology, Inc. (NASDAQ: MU) is involved in manufacturing, producing, and selling computer memory and computer data storage, which include 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

MU Rides on Surge in Demand for Memory & Flash Storage: Micron Technology, Inc. (NASDAQ: MU) is the fourth-largest semiconductor company across the globe. MU is involved 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).

Micron Technology, Inc. has been advancing leaps and bounds, thanks to a rise in demand for memory and flash storage needed in cloud data centers, autonomous vehicles the Internet of Things, and new technologies. The company is witnessing robust memory-chip demand from data-center operators as workers and students work and learn from home amid COVID-19-led social distancing measures adopted worldwide. Moreover, the company is well placed to benefit from the revival in DRAM demand, backed by progress in cloud-based applications, graphics, and PC markets. Notably, favorable mix of high-value solutions, improvement in customer engagement, and progress in cost structure remain a potential tailwind.

Led by coronavirus outbreak, there has been an extensive interruption in the supply chain and spending patterns across major industries. However, 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 MU. The company’s 3QFY20 results were primarily driven by solid memory chip demand. Moreover, MU’s positive outlook for the 4QFY20 remains encouraging. 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 MU.

MU 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.

Past Performance (Source: Company Reports)

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. Thus MU, being a semiconductor behemoth for providing design and other components for chip-making, is expected to benefit in the near-term.

Sneak Peek at Q3FY20 Key Highlights: During the quarter for the Period Ended May 28, 2020, the company reported non-GAAP earnings per share of 82 cents and revenues of $5.44 billion. MU’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% from the prior corresponding period. This illustrates the company's plans to stay buoyant amid the outbreak of COVID-19 led uncertainties, remain promising. The company’s DRAM revenues stood at $3.59 billion, an increase of 5.6% year over year and 16.3% from the prior quarter. DRAM revenues accounted for ~66% of total revenues in 3QFY20. Revenues from NAND (31% of total revenues) rose by 50.8% on pcp and 10% on a sequential basis and came in at $1.67 billion. NAND average selling price increased in the upper single-digit percentage range on a sequential basis.

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 MU’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.

Quarterly Highlights (Source: Company Reports)

Operating Highlights: During the quarter, non-GAAP gross profit stood 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 Highlights:  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. MU repurchased shares of approximately $40 million during the same time span.

Latest Key Updates:

1. On 5 August 2020, the company stated that it has appointed Kris Baxter as vice president and general manager of MU’s Embedded Business Unit (EBU). In another update, the company stated that it has appointed Lynn Dugle to its board of directors.
2. 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.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 36.3% of the total shareholding. The Vanguard Group, Inc., and BlackRock Institutional Trust Company, N.A. hold the maximum interests in the company at 8.12% and 4.94%, 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 18.5%. Net margin, in the same time span, stood at 14.7%, higher than the industry median of 8.6%. May’ FY20 debt to equity ratio stood at 0.18x, lower than the industry median of 0.38x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The ongoing macroeconomic and trade worries due to the COVID-led outbreak might have a denting effect on the company’s performance.  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 impending procurement of IM Flash Technologies, as well its joint venture with Intel, are expected to weigh on its margins, going forward. Further, the company also struggles with stiff competition from peers like Intel, SK Hynix, Samsung Electronics, Toshiba Memory and Western Digital Corporation.

What to Expect: Prospects for MU look encouraging as the company stands to gain from robust demand for memory chips from personal computer manufacturers and data-center operators. For 4QFY20, 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). MU 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).

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 $44.05 with a market capitalization of ~$48.94 billion. The stock made a 52-week low and high of $31.13 and $61.19, respectively, and is currently trading below the average of its 52-week trading range. The stock gave negative returns of ~10.25% and ~3.31% in the last one month and three months, 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), and Western Digital Corp (NASDAQ: WDC). Considering the above factors, we recommend a “Buy” rating on the stock at the closing price of $44.05, down 0.79% on 19 August 2020.

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

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