Tuesday, June 16, 2015 1:12:46 PM
June 16th, 2015 by Trefis Team
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Trefis
The memory business is highly cyclical in nature, which is why leading memory products manufacturer Micron Technology (NASDAQ:MU) has seen its topline fluctuate drastically in the past, with 2-3 years of growth followed by a decline in revenues. In 2012, macro weakness, a demand-supply imbalance, intense competition and declining selling prices lowered Micron’s top-line growth and impacted its profitability. However, increasing consolidation in the industry, rising demand from non-PC markets and improving memory product prices returned the company to profitability in fiscal 2013. Micron continued to perform strongly in fiscal 2014, reflecting healthy market conditions.
Though Micron expects the market conditions will remain favorable for its business in 2015, led by constrained supply in DRAM and solid demand for both DRAM and NAND, it expects its DRAM and NAND output growth to lag the industry growth in 2015. For calendar 2015, Micron is focusing on technology advancement and, as a result, expects its bit growth to be below industry average in the near term.
DRAM accounts for almost two-third of Micron’s revenue base. The segment has seen significant consolidation in the last 10-15 years, with the number of players declining from about 20 players to three at present. The overall DRAM market is expected to grow in the 25% range. For calendar 2015, Micron’s DRAM growth is expected to be below the industry average, but the company expects the same to be above the average rate of growth for the industry 2016 onward.
While PCs continue to be an important market for Micron’s DRAM products, we believe Micron will benefit from increasing its focus on other high growth segments, including mobile, servers and automotive applications. The company has increased its manufacturing capacity by over 90% (without adding to industry capacity) through acquisitions and redefining strategic joint venture partnerships in the last two to three years. A large manufacturing base and the capability to shift production easily between end-markets will serve Micron well in the long-term, in our view.
Our price estimate of $32.23 for Micron is at a more than 20% premium to the current market price.
See our complete analysis for Micron here (click link below for data)
Micron To Lower Its DRAM Exposure To PCs
Almost a decade back, a majority of Micron’s DRAM demand came from the PC segment. However, the industry has seen significant diversification of demand in the last few years, and a higher portion of DRAM demand now comes from a variety of applications, including mobile handsets, automotive, industrial networking applications, etc.
At present, about 30% to 33% of Micron’s DRAM business is focused on PC’s, 20% to 25% on mobile applications, 20% on servers (enterprise & cloud data center servers), and the remaining on networking, automotive and industrial applications. [1]
DRAM demand in the first quarter of 2015 was a little more sluggish than expected and it continues to be weak in Q2 2015. However, most observers expect demand to pick up in the latter half of 2015 with the launch of Windows 10. Given the current short-term weakness in the global PC market, Micron is allocating less production to PCs and continuing to shift more bit production towards the other faster-growing segments. The company’s DRAM guidance for the current quarter anticipates taking strategic actions to reduce PC DRAM sales given the recent demand and price weakness.
Capability To Shift Production Between Different End-Markets
Given Micron’s manufacturing capability, the company has in the past been able to easily shift production between PC DRAM and mobile DRAM. The company claims that it takes about 60 days to 90 days to migrate from PC to mobile. We believe the ease to shift production, in case the demand from either of the above mentioned segments becomes unpredictable, places Micron in a strong position to leverage long-term growth in DRAM.
Mobile & Servers Are The Fastest Growing DRAM Segments
The mobile and server segments are the fastest growing in terms of DRAM demand, with annual growth projected in the range of 30% – 50%. ((Micron Technology’s (MU) CEO Mark Durcan on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, January 6, 2015))
- Increasing DRAM content in smartphones – In addition to rising mobile shipments, the increasing content in smartphones (both high-end and low-end) will drive up demand for DRAM. At the recently held Morgan Stanley Leveraged Finance Conference, Micron mentioned that in general it expects a 50% plus content growth in the back half of 2015 versus last year. ((Micron’s Management presents at Morgan Stanley Leveraged Finance Conference, Seeking Alpha Transcripts, June 4, 2015)) Some of the company’s Tier 1 vendors have content at the high-end running in the 2 gigabyte to 3 gigabyte range, and one of Micron’s vendors is looking to double the memory content on the next generation phone. Even in the value segments, a lot of the value phones selling in China or India have more than 1 gigabyte or 2 gigabytes of content. Micron expects to see a fairly good mobile market in terms of the content growth in the back half of the year, as original equipment manufacturers (OEM) make sure they have the supply available to them as they ramp the next generation phones.
The acquisition of Elpida last year considerably expanded Micron’s footprint in the mobile DRAM market. As already mentioned above, mobile now represents roughly 20% – 25% of Micron’s DRAM business. Prior to Elpida’s acquisition, Micron generated less than 10% of its revenue from mobile DRAM.
- DRAM servers are less sensitive to price fluctuations - Micron claims that its server business also remains a very attractive segment with a demand profile that is less sensitive to price fluctuations in the market. The DRAM server market can be further split into – enterprise and data centers. The pure enterprise market is growing at a double-digit rate, while the data center market is growing at 60% – 70% per annum on a per bit basis.
The Automotive Segment Offers Margins Higher Than The Corporate Average
Though the automotive segment is a comparatively smaller part of the overall DRAM market, it is growing at a strong pace. Additionally, the segment offer margins above the corporate average and design in content that can last up to five to seven years. The overall content growth in the automotive segment is growing by about 10% to 15% in general per year for semiconductors.
The broad portfolio of capabilities and memory products allows Micron to hold a leading position in the automotive space. The company offers applications in the infotainment side as well as the telemetric side.
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http://www.trefis.com/stock/mu/articles/301081/micron-focuses-on-mobile-servers-automotive-as-it-reduces-its-dram-dependence-on-pcs/2015-06-16
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