Why Micron's Analyst Day Sent Shares Soaring

Micron Technology (MU 3.07%) has been on a tear over the past year. On Monday, May 21, the maker of DRAM and NAND flash memory held its 2018 Analyst Day. Not only did management increase the current quarter's guidance range for earnings per share, from a range of $2.76 to $2.90 to a much higher $3.12 to $3.16 per share, but key executives also outlined why Micron is primed for even more success in the coming years.

The market seemed to agree, sending shares up almost 4%, with nearly another 4% surge in after-hours trading when new CFO Dave Zinsner made an announcement Micron investors have been waiting years to hear. So, what had the market so jazzed?

Constrained supply, robust demand

The most important thing to understand about Micron's stock, and the memory industry in general, is the dynamics of market supply and demand. CEO Sanjay Mehrotra outlined the current favorable dynamics quite well: Big data and AI are driving a generational "virtuous cycle," in storage and memory demand; as more data is collected, it needs to be stored, accessed, analyzed, and redeployed into more tech-enabled solutions. All of these steps need lots and lots of memory.

The company projected impressive demand growth in several key end-markets through 2021, including data centers (mostly for cloud computing), mobile, automotive, and the Internet of Things:

Data source: Micron 2018 Analyst Day presentation.

In total, Micron expects compounded annual growth of 20% in DRAM and 40% to 45% in NAND over the next four years.

But while demand is surging, it's becoming far more difficult to increase supply. Mehrotra pointed to industry capital expenditures as evidence. Micron forecasts the DRAM industry will spend roughly $20 billion this year, which will increase supply roughly 20%. In contrast, 20% supply growth 10 years ago would have cost only $5 billion. Now it takes four times that to achieve the same supply growth. For NAND, the obstacles are even larger -- it now takes roughly 10 times the amount of investment to achieve 40% supply growth relative to a decade ago.

That constrained supply phenomenon is what has caused memory prices to surge in recent years, but while many think last year's price surge is prelude to the inevitable cyclical downturn, it appears, at least to Micron's team, that these constrained conditions will persist for the foreseeable future.

Micron is raining buybacks. Image source: Getty Images.

Executing against the competition

Micron also highlighted some impressive milestones in relation to its main competitors. Although it didn't name them specifically, these are Samsung (NASDAQOTH: SSNLF) and SK Hynix (NASDAQOTH: HXSCL).

Traditionally, Micron had been a laggard in the industry as the lowest-cost supplier, but according to management, that's no longer the case. The company's mantra for the past few years has been strict operational excellence and execution, and it seems those efforts have paid off. Management says in just the past two years, it has reduced DRAM costs 30% more than the rest of the industry, and reduced NAND costs by an even greater 90%. In just that two-year time frame, the percentage of customers ranking Micron their No. 1 or No. 2 memory supplier increased from just 44% to a whopping 86%.

The $10 billion cherry on top

With so much going right for the company, what's the payoff for shareholders? That would be coming in the form of a newly authorized $10 billion buyback. As of this writing, that amounts to a hefty 17% of the company's entire market capitalization. Prior to the analyst meeting, Micron didn't have any capital return program in place, choosing instead to pay down the sizable debt it incurred in the 2017 acquisition of Inotera, which left the company with $7.8 billion in net debt just over two years ago.

That net debt number should reach zero either this quarter or next, and starting in fiscal year 2019 (which begins in September), the company is pledging to deploy at least 50% of its free cash flow into buybacks. If conditions persist and the company's valuation remains at a low price-to-earnings ratio of 6, Micron could greatly reduce its share count.

The hits just keep coming

Micron's executives outlined why the current favorable industry climate should continue, and the company backing that up with its massive share repurchases. This was an A-plus presentation for investors, and I wouldn't be surprised to see Micron shares continue their ascent in 2018.