Micron Technology, Inc.
Executive Summary
Micron (MU) is a manufacturer of high-performance memory & storage technology products with great returns on capital, attractive margins, growing product demand, and an impressive financial position (minimal liabilities) with a notable near-term catalyst. Despite Micron’s recent run up from $29 per share in late December to its current standing at $41.58 per share (a 43% rise), no insiders have sold shares. Additionally, Micron announced a $10 billion share buyback program this past September, utilizing their ongoing free cash flow to finance this. As of their last quarterly report in December, they had only repurchased $1.8 billion, leaving ~$8.2 billion in demand for their stock still on the table.
Business and Industry Overview
The majority of Micron’s business lies in sales of dynamic random-access memory (DRAM) and NAND flash memory products. DRAM can largely be thought of as a computer chip that a computer uses as the main memory to store large amounts of information that need to be accessed quickly. Thus, DRAM is commonly used in personal computers, workstations, and servers. NAND on the other hand is a form of ‘flash’ memory that does not require power to retain data. You can think of NAND as the memory used in memory cards, USB flash drives, digital cameras, tablets & most importantly, phones.
Domestically, Micron’s biggest competitor in the storage-space is SanDisk (acquired by Western Digital (WDC)), who generated ~18% of Micron’s revenue last year. Seagate (STX) is another competitor in the storage-space, with roughly $8.4 billion in revenue this past quarter. However, Micron’s biggest competitor overall in the sector is Samsung Electronics, but as many are aware, they operate primarily on an international scale.
Cyclicality
The biggest criticism I’ve seen of Micron in the near-term is referenced towards the ‘cyclicality’ of their demand. When the economy is booming, their products are in high demand & thus sell for more and when the booming ends and the economy contracts, their demand shrinks & along with it, their margins. However, in accordance with their most recent quarterly report, their DRAM average selling price rose 37%, while their NAND average selling prices dropped 11%. In accordance to that same quarterly report, their DRAM product line accounts for ~68% of their revenue while NAND products account for ~28% of the overall revenue. Also, to note Micron’s DRAM product revenue grew 18% year-over-year while NAND product revenue grew ~15%. As a whole, Micron’s year-over-year revenue increased ~16%. Can glean some insight into the global demand trend in looking at Samsung’s most recent quarterly report.
So that’s Micron’s performance this past quarter, the biggest question related to their volatility related to the cyclical demand of the market lies in looking forward. We can glean some insight by looking at what the competition has reported related to forecasted demand over this next year and combining it with what we’ve been hearing from Micron’s executive team. First, lets take a look at Samsung’s most recent report. As mentioned previously, Samsung has a pretty expansive DRAM and NAND segment globally. In Samsung’s Q4 ’18 results (reported in January) they reported this:
Interestingly, they noted that in the past quarter, memory demand decreased due to “mounting external uncertainties & inventory adjustments at major customers.” While the verbiage is vague, I take that as a nod to the global slowdown we’ve seen throughout China & the EU & it’s effect on the rest of the global customers. Many seem to be wary of the possibility of a global recession around the corner, where it’d be expected demand would slow to a crawl & so are subsequently adjusting their demand of semiconductors to prepare for it. Subsequently, they note that both DRAM and NAND product demand was influenced by that factor. However, in the 2019 outlook, it’s interesting that the demand is expected to grow. Specifically, they noted, “Demand to improve on strong seasonality and a shift towards higher-capacity chips by major applications.” This hints at a concept that I’ve assumed to be true for a while. The proponents of the cyclicality argument seem to overlook the idea that we’re in a society both domestically and globally where we are seeing massive technological growth, as we have been seeing over the past 20 years. That growth hasn’t slowed and if anything, has expanded to previously non-technological geographic areas. Meanwhile the developed countries have been racing to develop the most advanced technologies year after year. This technological race, in theory, can negate a large part of the cyclical nature related to the demand considering that even when things are slow, corporations around the world are focused on technological development. In large, a lot of the biggest players in the global economy have realized the way to get ahead in the market is via dominant technology behind their business.
To pivot, let’s take a look at how Micron views their demand going forward. Specifically, they noted:
Similar to Samsung, Micron’s outlook seems to be optimistic of increased demand throughout 2019, albeit a slowing increase. The more interesting point hinted at in this outlook, which will lead us into the next section, is the flexible & conservative nature of management that has led them to the strong financial position Micron has that will allow them to weather any sort of slowdown beyond their expectations that could occur. This demeanor is hinted at in the outlook when they note both “Taking actions to lower our DRAM bit output growth to ~15%” and “Taking actions to lower out NAND output.” Both of these notes hint at the “better safe than sorry” action-taking that illustrates a proactive rather than reactive approach to the business by Micron’s management. We’ll touch further on this in the next section.
In summary, the growth in both the DRAM and NAND segments this past quarter is an illustration of Micron’s growing product demand when taken in combination to their largest competitor in Samsung suffering decreased demand in the same quarter. Additionally, with both powerhouses optimistic on growth in the market throughout this year, despite much of the global marketplace wary of a global recession, I think this points to an optimistic outlook or largely negated cyclicality related to demand.
Management & Efficiency
One of the biggest aspects that makes me optimistic on Micron over the long-run that I believe much of the market overlooks, is the conservative-nature demonstrated by their management over the past couple years. While times have been good for the business, they’ve largely taken care of their liabilities rather than expanded their leverage. This has positioned Micron well financially, if a downturn in market demand was to hit. Subsequently, this has freed up a lot of the free cash flow where it would otherwise be tied to liability repayments. Additionally, management has been able to aggressively grow their operating margin over the past 2 years while maintaining their R&D expenses (which is an important variable to product development in the industry) each quarter. Since 12/1/16, we’ve seen roughly a 5-fold increase to the operating margin (from 9% to 48%). In Micron’s most recent quarterly report it’s forecasted for gross revenue (Revenue – COGS) to be roughly in-line with it’s current levels, leading me to be optimistic that the operating margins will follow suit. Throughout the past 2 years, quarterly revenue has also grown from $3.9 billion to $7.9 billion while the cost of goods sold (COGS) has largely been able to remain at a stable level ($2.9 billion to $3.2 billion). Notably research and development expenses has grown from $470 million to $611 million in that same time period. Throughout that same time period Micron’s overall debt (both short-term & long-term) has shrunk from it’s peak of ~12.4 billion in early 2017 to its current level around $4.1 billion.
Here’s a quick summary of Micron’s position and results as of their past annual report:
It can be overwhelming at first, but let’s expand on a few of these. First, I’d like to note the 2.20 Quick Ratio ((Cash+Equivalents+AR)/Current Liabilities) gives us a picture of the company’s short-term liquidity position. In this scenario that 2.20 illustrates that Micron had 2.2x the liquidity needed to cover their short-term liabilities. This largely relates to the 0.12 we’re seeing for Micron’s Debt/Equity. The “healthy” level of debt/equity is discretionary, but it’s largely considered that a debt-to-equity of 1.5 to 2 is the upper band of a “healthy” debt-to-equity level. From a safety perspective, Micron’s level of 0.12 is glorious. Also noteworthy is the ROA, ROE & ROI Micron has exhibited. To exhibit the strength of these numbers, I largely look towards companies within the same industry/sector to compare with. Here’s a screen-grab of AMD, another U.S. semiconductor manufacturer with a focus on processors and graphics cards:
As we can see, Micron’s Return-on-Assets is ~4.3x that of AMD’s. Meaning, for every $1 of assets, Micron generates ~$0.35 in profit compared to AMD’s return of only $0.08 for every $1 of assets. This same sort of relative dominance extends to both Return-on-Equity & Return-on-Investment as well. While we’re comparing metrics, I think it’s also important to note AMD’s Debt/Equity levels being 9x that of Micron’s & AMD’s current (& quick) ratio being roughly half of Micron’s. From a competitive perspective, this is a great illustration of how Micron’s conservative decision-making has led them to a superior financial position in a market where many corporations have taken advantage of good-times to further leverage their books, leading to a debt-bubble we’re currently seeing in the corporate space.
Catalyst
In Micron’s last annual report (10-K), they laid out their geographic net sales as follows:
In a recent report by CNBC, “China’s top economic planning agency is floating a plan to increase U.S. semiconductor sales to China to a total $200 billion in the next six years.” This has been floated as one viable option to appease the U.S.- China trade-deficit & subsequent talks that have taken center-stage over this past year. This would be roughly a 5x increase to the current levels of exports, so a huge boost to demand. This further plays into the narrative of a global economy focused on technological advancement, despite the cyclical-nature of economies.
As you can see above, roughly 57% of Micron’s net sales were to China customers. That’s a notable relationship that I speculate would be boosted significantly if that plan were to come to fruition. Another important perspective on that geographic distribution of sales is that, despite a deteriorating trade relationship between the U.S. & China coming to fruition over the past quarter, Micron’s quarterly report saw growth in demand/revenue rather than a contraction. I believe these results further hint at the strong customer relationship internationally and growth in demand for their products.
Disclaimers
This report is provided for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell an interest in any securities.
Additionally, I currently have a long position in MU common stock.
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