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

Geographical Expansion & Robust Product Adoption Aids Micron: 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 2020, the company reported revenues of $21.44 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).

Geographical Diversification (Source: Company Reports)

The company opines that Covid-19 led pandemic lockdown is stimulating demand for PCs and notebooks as number of workers and students who are working and learning from their homes are increasing by each passing day. The trend is expected to continue in the coming days as well, thereby aiding its top-line performance. 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. 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.

The virus outbreak has led to an extensive interruption in the supply chain and spending patterns across major industries. Nevertheless, 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 4QFY20 results were primarily driven by solid memory chip demand. 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. Over a period of FY15-FY19, the company saw a CAGR of 9.6% and 21.5% in revenue and net income, respectively. MU 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)

Q4FY20 Key Financial Highlights: During the quarter for the period ended September 3, 2020, the company reported non-GAAP earnings per share of $1.08 and revenues of $6.06 billion. The company’s both top-line and bottom-line increased ~24.4% and 93%, respectively, from the prior corresponding period. This illustrates the company's plans to stay buoyant amid the outbreak of COVID-19 led uncertainties. The company’s DRAM revenues stood at $4.37 billion, an increase of 29% year over year and 22% from the prior quarter. DRAM revenues accounted for ~72% of total revenues in 4QFY20. Revenues from NAND (25% of total revenues) rose by 27% on pcp and came in at $1.53 billion.

During the quarter, non-GAAP gross profit stood at $2.11 billion, up 41.6% year over year and 17% from the previous quarter. Growth in gross profit was due to rising pricing at both DRAM and NAND and favourable product mix. Non-GAAP operating income stood at $1.3 billion, as compared to $694 million reported in the year-ago period.

Quarterly Highlights (Source: Company Reports)

Revenues by Business Units: Business units wise, CNBU consists of DRAM and NOR Flash products and increased 59% year over year and 36% sequentially and stood at $3.02 billion. The increase was on the back of robust strength in the Cloud and Client segments on the heels of work-from-home infrastructure. MBU includes MU’s discrete DRAM, discrete NAND, and managed NAND products. This segment reported revenues of $1.46 billion in 4QFY20, which increased 4% year over year. SBU and EBU units reported revenue of $913 million and $654 million, respectively, during the quarter.

Revenues by Business Units (Source: Company Reports)

Capital Management:  The company exited the quarter with a cash balance of $8.14 billion. Current and long-term debt at the end of the period amounted to $6.6 billion. Notably, net cash at the end of the period stood at $2.6 billion, depicting a sound financial position. During the quarter, operating cash flow stood at $2.3 billion, whereas, adjusted free cash flow came in at $111 million. During FY20, the company generated operating and free cash flows of $8.3 billion and $361 million, respectively. MU repurchased shares of approximately $41 million during 4QFY20 and $176 million in FY20.

Capital Allocation (Source: Company Reports)

Latest Key Updates:

(1) On 8 September 2020, Micron’s worldwide consumer brand of computer memory and storage, Crucial, informed the market about its limited edition of Crucial Ballistix MAX 5100 gaming DRAM, thereby aiding consumers with an optimal gaming memory option.

(2) On September 1, 2020, the company unveiled GDDR6X, the world’s fastest discrete graphics memory solution, to power system bandwidth up to 1 terabyte per second (TB/s). Micron’s new GDDR6X is powered by NVIDIA® GeForce RTX™ 3090 and GeForce RTX 3080 graphics processing units (GPUs), thereby providing high-performance computing applications to consumers.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form 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 FY20 quarter’s gross margin, EBITDA margins and net margins at 30.6%, 40.5% and 12.6%, respectively. FY20’s current ratio stood at 2.71 x, higher than the industry median of 2.58x. Debt to equity ratio stood at 0.17x in FY20, slightly higher than the year ago ratio of 0.16x.

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.  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. In 4QFY20, MU disclosed that it has not gained the U.S government’s license to sell its chips to China’s Huawei Technologies. Notably, chip sales to Huawei depicted ~10% of the MU’s 4QFY20 total revenues. Restrictions on export to Huawei may likely weigh on the company’s top-line performance, going forward. Further, the company also struggles with stiff competition from peers like Intel, SK Hynix, Samsung Electronics, Toshiba Memory and Western Digital Corporation.

Outlook: Prospects for MU look encouraging as the company stands to gain from decent demand for memory chips from personal computer manufacturers and data-center operators. 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. Thus MU, being a semiconductor behemoth for providing design and other components for chip-making, is expected to benefit in the near-term.

For 1QFY21, the company expects revenues to be ~$5.2 billion (+/-$200 million). Non-GAAP gross margin is expected to be approximately 27.5% (+/- 100 bps). The company expects non-GAAP operating expenses to be $825 million (+/- $25 million). Earnings per share are expected to be 47 cents (+/- 7 cents).

Q1FY21 Outlook (Source: Company Reports)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative 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 $51.63 with a market capitalization of ~$57.36 billion. The stock made a 52-week low and high of $31.13 and $61.19, respectively. The stock gave positive returns of ~5.3% and ~11.3% in the last one month and six months, respectively. On a technical front, the stock of MU has a support level of ~$46.57 and a resistance level of ~$60.48. 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 an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of lower double-digit upside (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). Hence, we recommend a “Buy” rating on the stock at the closing price of $51.63, down 0.42% on 14 October 2020.

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

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