Did you ever wonder how your smartphone, tablet or computer works? At the most basic level, they use semiconductors, which act as switches to allow the flow of electricity. Micron Technology (MU) is one of several companies that manufactures semiconductor chips and products. As consumers worldwide embrace mobile technology, semiconductor manufacturers like Micron stand to benefit. But competition from Asia, especially from Taiwan and South Korea, is fierce. Is Micron Technology stock a good buy?
Founded in 1978 in Boise, Idaho, Micron has become a global leader in semiconductors and has manufacturing facilities worldwide. In the United States, it the third largest semiconductor company by market share and revenues lagging behind leaders Intel (INTC) and Qualcomm (QCOM). Other competitors include Samsung, Taiwan Semiconductor Manufacturing (TSM), SK Hynix, Toshiba, SanDisk Corp (SSDK), and United Microelectronics (UMC).
How Micron Technology Makes Money
Micron Technology has four main business segments: computer and networking, mobile, storage, and embedded. These are the three classes of products that drive Micron’s sales.
1. DRAM products. These are memory devices that provide high-speed storage. Different characteristics such as performance (speed) influence price. DRAM products have been a growing source of sales for Micron. Between 2012 and 2014, DRAM product grew from 39 percent to 68 percent of total company revenues.
2. NAND Flash products. These are memory devices that have fast erase and write ability and retain content when power is turned off. NAND Flash sales have been a declining percent of MU revenues, dropping from 44 percent in 2012 to 27 percent in 2014.
3. NOR Flash products are similar to NAND Flash but with execute-in-place ("XiP") capability (useful so the processor does not have to access RAM first) for wireless and embedded products. Similar to NAND Flash, sales have steadily declined. NOR Flash products were 12 percent of sales in 2012 and just to 3 percent in 2014.
Stock Performance and Outlook for Growth
According to Wall Street Research, the catalysts expected to drive Micron Technology stock over the next years are related to increasing worldwide smartphone use and advancing capabilities in mobile technologies which require more DRAM. For example, according to Bank of America research, Apple uses two times more DRAM in its iPhone 6. Growth is also expected to come from China and other emerging economies demanding more value-added chips. Storage and the cloud are huge drivers in the tech space and the use of more branded products versus just supplying raw chips should drive demand and market share. New technology can also spur greater demand in other embedded markets, such as the use of chips in automobiles.
The above factors should lead to stable pricing for semiconductor memory products in the near future. In the past, semiconductor memory products prices have fallen dramatically. This usually happens when supply greatly exceeds demand and competitors try to undercut each other. Industry research expects supply to be tight and competitors to remain disciplined. However, if these two factors fail to meet expectations, then prices could destabilize and profitability will be negatively impacted. Another specific risk for Micron is its concentration of sales. In 2014, almost 30 percent of Micron’s sales were generated by just a handful of clients: Kingston accounted for 10 of Micron sales, Intel accounted for 8 percent, and Hewlett Packard accounted for 9 percent.
Gross margins are typically a good indicator of both stable pricing and the ability to reduce manufacturing supply to come in line with demand. From 2010-2014, gross margins fluctuations influenced by market, industry and economic conditions were as follows: 32 percent, 20 percent, 12 percent, 20 percent, and 33 percent, respectively. In upcycles, a gross margin of around 30 percent is a good signal.
If all of the expected growth factors materialize, Micron’s multiple should expand from its current level. At a trailing twelve-month price-to-earnings (TTM P/E) ratio of 10x, Micron valuation is significantly below its industry average of 17x, although in line with its historical average. To be fair, several of its competitors are technology conglomerates producing a large range of products (not just chips, memory, and drives), which may result in poor comparisons. Nevertheless, Micron is valued at the lower end of the range. Coinciding with the lower P/E multiple, MU's price-to-book (P/B) is 2.7x compared to 3.5x for the industry. However, a return on equity (ROE) at 32.7 percent (versus 22.8 percent for the industry) suggests the multiples should expand to above industry averages to coordinate with the higher returns.
The Bottom Line
Micron Technology operates in an exciting and growing tech space but also a very competitive one. In addition to strong conglomerate competitors, Micron’s revenues are also impacted by the state of the global economy. A slowing economy could impact consumer’s abilities to purchase products that use Micron’s chips.