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Beyond Micron Technology’s Confusing Earnings Lies a Promising Future

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Confusion surrounded chipmaker Micron Technology's (NASDAQ: MU  ) latest fourth-quarter results. While some analysts reported that Micron posted mixed results, beating estimates on revenue but missing on non-GAAP earnings, data compiled by Bloomberg and Barron's revealed that Micron beat earnings estimates.  

In addition, Wells Fargo downgraded the stock to underperform, even though it actually raised the target price to $14-$17 from $11-$14. Hence, it can be said that the earnings report created a lot of confusion and division among analysts, and Micron has pulled back by around 8% since it reported earnings on October 10.

Looking beyond the confusion
Micron posted 45% year-over-year growth in revenue in the previous quarter, helped by its acquisition of Elpida and Rexchip. The Elpida acquisition has helped Micron grow its DRAM business two-fold and gives the company greater control over supply in the industry. It also strengthens its position in mobile DRAM. 

Looking ahead, Micron expects its DRAM business to perform well, driven by a favorable pricing environment. The company expects DRAM supply to decline in the next year, and a fire at rival memory maker SK Hynix's factory, which disrupted supply, is expected to aid this trend. Even after discounting the favorable effect of the fire, Micron is expecting DRAM industry supply to increase to the mid-20% range over the next two years. 

This compares favorably to the annual growth rate of around 30% in demand. DRAM demand is expected to improve as a result of application in mobile devices. Digitimes Research is projecting a 70% year-over-year rise in mobile DRAM demand in the current quarter, and Micron should benefit from this trend.

An important driver
Micron's acquisition of Elpida is expected to help the company strengthen its position in the mobile DRAM industry by increasing its market share to almost 23%. In addition, Elpida had supplied DRAM to Apple (NASDAQ: AAPL  ) for the iPhone 5s, which means that Micron now has a major mobile customer on its client list.  

Apple is reported to be cutting production of the cheaper iPhone 5c. But, Micron investors shouldn't panic as the smartphone giant is instead rumored to be accelerating production of the flagship 5s.

Earlier, a report by Digitimes stated that Apple could be on track to manufacture 30 million units of the iPhone 5c in the fourth quarter. The report also said that 10 million-15 million units of the iPhone 5s could have been manufactured in the previous quarter, with another 20 million slated for the fourth quarter.

With Apple expected to sell around 50 million iPhones in the holiday quarter, and the more expensive iPhone 5s probably gaining more traction, Micron could see a further boost in its revenue and margins.

NAND prospects also look strong
Hence, Micron's DRAM business is expected to perform well, and the same can be said about its NAND business as well. NAND industry fundamentals are also favorable, as industry supply is expected to increase in the low-40% range this year and the next. In comparison, demand has been growing at an annual rate of 43%, which means that industry trends remain in Micron's favor.

However, Micron forecasts a decline in high single-digits in NAND prices in the ongoing quarter, but a similar decline is expected in bit costs as well. As such, the company shouldn't have much difficulty maintaining its margins. With NAND production slated to increase due to higher demand for solid-state drives (SSDs), the company could generate higher revenue and profits without compromising margins.

Micron's SSD business jumped an impressive 76% in the last fiscal year and the company seems to be finding good traction at SSD manufacturers. Two of Micron's new enterprise drives were approved by important customers in the previous quarter. More than 50% of the company's NAND revenue comes from SSDs, and this share could continue growing in the future. 

The bottom line
Micron's DRAM and NAND businesses are doing well. The company is witnessing good demand for its chips and the presence of a big volume customer such as Apple certainly helps. The trends in the industry also look favorable, and that's why investors should ignore the confusion around its recent results and stick to their long positions.

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