Micron Technology Inc's Prospects Continue to Look Good

Micron Technology's share price has surged over the last year following great results. Can the company continue this growth going forward?

Jun 9, 2014 at 3:32PM

Memory provider Micron Technology (NASDAQ:MU) is very hot right now. Its stock has climbed steadily over the last year, and currently trades at 130% of its price from 12 months ago. The company's performance is backing this up, with record revenue of over $4.1 billion in the second quarter and an improved gross margin at 34%. The big question is, can Micron keep improving on these results in order to maintain its growth?

Improvements in the gross margin
The first reason to believe that Micron can continue its growth is that its 34% gross margin, while an improvement, is still far behind competitors such as Samsung and SanDisk (NASDAQ:SNDK). Of the company's two main products, DRAM and NAND, DRAM is doing much better, with a gross margin in the high 30% range, above the company average, and close to the 40%-45% range that CEO Mark Durcan has said is possible.

But the gross margin for NAND is only in the high 20% range. This compares poorly with SanDisk, which sells just NAND products, but managed a 51% gross margin in its latest quarter. A part of the difference comes down to technology -- about 40% of SanDisk's NAND is a version called triple-level cell (TLC) NAND, which costs 20% less to produce but sells for just as much as the type that Micron primarily produces.

Durcan has admitted that not focusing on TLC was a misstep that the company will definitely correct going forward. He has also called the decreased NAND margins a great opportunity, and a "low-capital problem to solve." Micron has implemented an organizational restructuring to address issues within its NAND business, and Durcan estimates that improvements should be visible within 2-6 quarters.

Memory solutions rather than components
The second reason to believe in Micron's continued growth is its current focus on differentiated, higher-margin solutions. Micron has traditionally sold its chips as commodities, but that's changing. According to Durcan, "We don't sell components any more, and that's not the future for memory manufacturers. What customers want from memory suppliers is memory subsystems that are optimized for their end applications."

Durcan emphasized that customers are often becoming partners, as OEMs such as EMC or service providers with large data centers such as Google or Facebook want to collaborate on memory solutions in order to increase the value that they are getting. Mobile handset companies, like Micron's customer Apple, are also always looking to improve performance and reduce size, and will increasingly work with Micron to design optimized solutions.

Clearly, Micron will have its work cut out here, as the competition will be moving in the same direction. For example, SanDisk, which has focused on its own products rather than selling commoditized chips for a long time, grew sales of its enterprise and client SSDs 65% in the last year. Nonetheless, with its strong presence in both DRAM and NAND, Micron is in a good position to deliver.

The industry is healthy
The third reason to keep liking Micron is the overall state of the memory industry. Demand for memory is expected to increase steadily over the next five years, with Micron estimating 20%-30% yearly increases in DRAM demand, and 30%-40% increases for NAND.

Just as importantly, it appears that there is an implicit agreement among the remaining memory providers to increase supply only slowly, thereby maintaining average selling prices. This has not been the case historically, as the industry used to comprise 20-30 suppliers who would often flood the market with chips and drive prices down. In the words of Micron's Kipp Bedard, this is the first time in the history of the company that there "doesn't appear to be anybody on the horizon to accelerate this irrational capital that's kind of plagued our business and made it so cyclical."

In conclusion
Micron Technology has performed very well over the last year, and there are reasons to believe that this can continue. First, it has made moves to improve profitability in its NAND business that should become visible in the next year. Second, it is focusing on building differentiated solutions in cooperation with clients, which will bring higher margins. Finally, the memory market as a whole is looking good for the next several years, with growing demand and managed supply that won't decrease prices.

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Srdjan Bejakovic has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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