Micron (MU +3.15%) and Samsung (NASDAQOTH: SSNLF) are two of the largest memory chipmakers in the world. The former is considered a "pure play" on the memory chip market, while the latter is a diversified tech giant that also sells mobile devices, consumer electronics, displays, and other components.
Therefore, Micron generally rallies higher than Samsung on soaring memory prices, but takes a bigger hit when those prices decline. That was particularly true this year, when memory prices peaked following a two-year boom. Micron's stock fell nearly 30% over the past six months, while Samsung only lost about 10% of its value.
Image source: Getty Images.
Looking ahead, investors might believe that Samsung is a safer all-around investment than Micron. Let's take a closer look at both companies to see if that's true.
Comparing business models
Micron is the fourth largest maker of NAND chips and the third largest maker of DRAM chips in the world. Samsung is the biggest player in both markets. The companies' main memory chip rivals include Toshiba, Western Digital, and SK Hynix.
Last quarter, Micron generated 70% of its revenue from DRAM sales, 26% from NAND sales, and the rest from other chips. Surging memory prices clearly boosted its revenues in previous quarters, but its top line growth is decelerating as chip prices decline into 2019:
|
Q1 2018 |
Q2 2018 |
Q3 2018 |
Q4 2018 | |
|---|---|---|---|---|
|
Revenue |
$6.8 billion |
$7.4 billion |
$7.8 billion |
$8.4 billion |
|
YOY growth |
71% |
58% |
40% |
38% |
Source: Micron quarterly reports.
For the first quarter Micron expects just 16% to 22% sales growth. Analysts expect its revenue to rise just 1% for the full year, compared to 50% growth in 2018. The bulls think Micron can offset declining memory prices by selling more chips for Internet of Things (IoT) devices, but its slowdown indicates that it's still heavily dependent on core markets like PCs, mobile devices, and data centers.
Samsung splits its business into four units: Consumer Electronics (CE), which sells TVs and other appliances; IT & Mobile Communications (IM), which include its smartphones; Device Solutions (DS), which produces memory chips, displays, and other components; and Harman, the audio and connected device maker it acquired last year.
Image source: Samsung.
53% of Samsung's revenue came from the DS unit last quarter, with memory chip sales accounting for 61% of the unit's revenue (or 32% of Samsung's top line). 38% of Samsung's revenue came from the IM business, mostly from sales of mobile devices. 16% of its revenue came from the CE division, and the remaining sliver came from Harman.
Samsung's revenue rose 5% annually last quarter as the growth of its DS and Harman divisions offset the declines at its IM and CE units.
|
Q4 2017 |
Q1 2018 |
Q2 2018 |
Q3 2018 | |
|---|---|---|---|---|
|
Revenue* |
66.0 trillion KRW |
60.6 trillion KRW |
58.5 trillion KRW |
65.5 trillion KRW |
|
YOY growth |
24% |
20% |
(4%) |
5% |
Source: Samsung quarterly reports.
Samsung's growing dependence on its DS unit, which it's using to offset slower demand for its TVs and mobile devices, could become a major liability as memory prices drop and display orders from Apple peak. Analysts expect Samsung's revenue to rise just 5% this year, compared to 19% growth last year.
Profitability and valuations
Between the fourth quarters of 2017 and 2018, Micron's non-GAAP gross margin expanded from 51.3% to 61.4%. That also represented a 50 basis point improvement from the third quarter.
But for the first quarter, Micron expects that figure to contract to 57%-60% as average selling prices for DRAM and NAND chips peak and decline. That's why analysts expect Micron's earnings to drop 14% this year and another 6% next year. Micron's stock might seem ridiculously cheap at 4 times forward earnings, but investors clearly think that a cyclical downturn in memory prices will cause more pain.
Samsung's gross margin dipped 60 basis points annually to 46.2% last quarter. Meanwhile, its DS unit generated a whopping 83% of its operating profits during the quarter, with semiconductors accounting for 94% of that total.
This indicates that Samsung's bottom line is just as exposed to sliding memory prices as Micron's -- and dispels the notion that it's a "safer" stock. It also indicates that Samsung's days of offsetting the weaker margins of its consumer electronics and smartphones with higher-margin chip sales are numbered.
Analysts expect Samsung to post 16% earnings growth this year, followed by a 6% decline next year. Samsung's stock also looks cheap at 7 times forward earnings, but the company will likely struggle to generate consistent earnings growth next year.
The verdict: Buy neither
Micron and Samsung both benefited from the boom in memory prices, but they now face an inevitable bust -- which could be exacerbated by China's plans to flood the market with cheaper memory chips. Therefore, I'd steer clear of both stocks until the smoke clears.
