Micron Technology (MU +6.21%) has rallied more than 20% this year on the belief that tighter DRAM and NAND (flash memory) supplies could boost memory prices across the market. But despite those positive catalysts, Micron sales and earnings growth remain weak. Revenue fell 25% year over year last quarter, compared to a 30% decline in the previous quarter and a 3% decline in the prior-year quarter.
Image source: Micron.
In the NAND market, Micron faces tough competition from larger rivals like Samsung (NASDAQOTH: SSNLF), Toshiba, and Western Digital's (WDC +4.04%) SanDisk. In the mobile DRAM market, it lags behind Samsung and SK Hynix. Analysts expect Micron's sales to fall 24% sales this year, compared to a 1% decline last year.
Micron posted a non-GAAP net loss of $0.08 per share last quarter, compared to a loss of $0.05 in the previous quarter and a profit of $0.54 a year earlier. In addition to tough competition, Micron's bottom line has been dragged down by market oversupply, pricing pressures, and challenges from integrating the manufacturing processes of its combined Elpida and Micron fabs. Analysts expect Micron's annual earnings to merely break even at $0.00 this year, compared to a profit of $2.47 per share in 2015. Micron also isn't cheap at 49 times earnings, which is more than four times the average P/E of 11 for the memory chips industry.
In my opinion, there are safer ways to play the rebound in memory prices than Micron. Intel (INTC 3.29%) and Western Digital, for example, both offer better diversification with exposure to the same markets.
Intel's a more diversified computing play
Intel left the DRAM market in 1985 amid intense competition, but started jointly developing NAND chips with Micron in 2006. That partnership formed the foundation of Intel's non-volatile memory business, which generated 4% of its sales last quarter. Together, the two companies developed new memory technologies like 3D NAND and 3DXPoint, the latter of which could offer "1,000 times" the performance of current-gen NAND chips.
A 3DXPoint wafer. Image source: Micron.
Intel frequently highlights non-volatile memory alongside the Data Center, Internet of Things, and Programmable Solutions businesses as ways to diversify its top line beyond PCs. However, the ongoing decline in memory prices caused Intel's non-volatile memory chip revenue to fall 20% annually last quarter. The unit also posted an operating loss of $224 million, down from an operating profit of $92 million in the prior year quarter.
Those gloomy figures mirror Micron's results, but Intel generates most of its revenue and operating income from its dominant Client Computing (PC and mobile solutions) and Data Center groups. The ongoing slowdown in PC sales caused Intel's Client Computing revenue to fall 3% annually last quarter, but that decline was partly offset by 5% growth in Data Center revenues.
Rising memory prices won't boost Intel's sales as much as Micron's, but Intel offers investors more balanced growth than Micron. Analysts currently expect Intel's revenue to rise 4% this year while earnings are expected to improve 7%. Intel also trades at just 18 times earnings, compared to the industry average of 22 for broad line semiconductor companies, and it pays a forward dividend yield of 2.9% -- while Micron has never paid a dividend.
Western Digital's a more diversified NAND play
Western Digital stock slid 14% this year due to sluggish sales of older HDDs (hard disk drives), which were being cannibalized by NAND-based SSDs (solid state drives). However, WD made a bold move and purchased SanDisk for $19 billion earlier this year.
The purchase instantly made it the third largest NAND maker in the world with a 15% market share, according to DRAMeXchange's first quarter figures. Samsung leads the market with a 35% share, while Toshiba and Micron respectively control 22% and 13% of the market. While the massive acquisition will take time to fully integrate, analysts expect the move to reduce WD's dependence on HDDs and get its sales growth back on track with 2% top line growth next year.
SanDisk's Fusion ioMemory flash devices (L) and enterprise SSDs (R). Image source: SanDisk.
WD's main HDD rival, Seagate (STX +0.00%), hasn't made a meaningful purchase in the NAND space yet. Instead, it formed a multi-year strategic alliance with Micron to expand its presence in enterprise SSDs. That plan hasn't impressed analysts, who still expect Seagate's sales to slide 3% next year.
To fund the SanDisk acquisition, WD suspended its buybacks, thus reducing its EPS growth. However, the company is still expected to post 44% earnings growth next year (as SanDisk becomes earnings accretive), which makes its forward P/E of 8 look very cheap. Moreover, WD pays a forward dividend yield of 3.9%, which is still easily supported by its FCF payout ratio of 33% over the past 12 months. Like Intel, WD is a cheap dividend play instead of an aggressive bet on memory prices rising, but its SanDisk unit will still benefit from that turnaround when it happens.
The bottom line
Micron would benefit much more than Intel or WD from rising memory prices, but it could also lose a lot more if that recovery is delayed. So with the market near all-time highs, I personally prefer buying cheap income-generating investments like Intel and WD over speculative turnaround plays like Micron.
