While the broader semiconductor sector has recovered strongly in recent weeks after the March stock market crash, Micron Technology (MU -0.18%) has failed to keep up the pace.
Shares of the memory specialist have lagged the broader market this year as investors fear that supply-related disruptions could throw Micron's recovery off track. But the latest developments at Micron tell us that the chipmaker is gearing up for a breakout, thanks to the growing demand for 5G smartphones and data center-related tailwinds. Let's see why.
Micron's upgraded guidance exudes confidence
Micron Technology recently upgraded its fiscal third-quarter guidance by substantial margins. The company now expects non-GAAP earnings between $0.75 per share and $0.80 per share on revenue of $5.2 billion to $5.4 billion for the three months ending on May 28.
The chipmaker's original guidance (issued in March) called for $4.6 billion to $5.2 billion in revenue and $0.55 per share in non-GAAP earnings. Micron has bumped its gross margin expectation from 31% to a range of 33% to 34% for the recently concluded quarter.
Micron reported $4.79 billion in revenue in the prior-year quarter, indicating that the company's turnaround is nearly complete thanks to the recent uptick in memory prices. DRAM prices are expected to increase by 11% sequentially in the second quarter of 2020, according to a third-party estimate. NAND flash prices are expected to jump 13% this quarter, according to DigiTimes.
This jump in memory prices isn't surprising, as the demand for dynamic random access memory (DRAM) and NAND flash memory has increased in recent months on account of COVID-19. Shelter-in-place orders have led to an increase in data center workloads as organizations have transitioned to telecommuting to keep their employees safe and break the chain of the pandemic. Similarly, people staying at home are streaming more video content and playing more games for entertainment.
More importantly, Micron was already prepared to tap the growing demand for data center products before the novel coronavirus outbreak confined people to their homes. This is why the recent bump in Micron's guidance isn't much of a surprise -- the company has benefited from a combination of improved pricing and higher demand.
But don't be surprised to see Micron's turnaround gain momentum in the coming quarters, as memory demand from 5G smartphones could give it a nice shot in the arm.
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5G smartphones could be a big tailwind for the memory business
Micron's mobile business unit (MBU) didn't do very well in the second quarter of 2020, with revenue declining 22% year-over-year to $1.3 billion. The company blamed the steep revenue decline on seasonality and its decision to drop certain businesses because of price-related concerns.
As Micron gets 27% of its total revenue from the MBU, weakness in this segment is pulling the company's overall performance down. But that's unlikely to be the case in the long run, as Micron expects its mobile memory addressable market to expand substantially thanks to the advent of 5G smartphones.
According to a recent presentation by Raj Talluri, the general manager of Micron's MBU, flagship 5G smartphones are expected to sport at least 8 GB of DRAM, compared to the 6 GB standard for 4G smartphones. A similar trend is expected in high-end devices, while entry-level 5G smartphones are expected to have at least 6 GB of DRAM, compared to 2 GB and 4 GB configurations earlier.
The NAND flash storage market is also expected to get a shot in the arm, with flagship devices sporting 256 GB and 512 GB configurations, compared to 128 GB and 256 GB configurations earlier. High-end devices are also expected to enjoy a similar growth in storage capacity, while entry-level 5G smartphones could see their NAND storage capacities go up to 64/128 GB from 32/64 GB earlier.
All in all, Micron anticipates the mobile DRAM business to produce a compound annual growth rate of 15% through 2022, while NAND demand is expected to grow at 30% annually. The company also estimates that 450 million 5G phones will be shipped in 2021 on the back of a smartphone replacement cycle triggered by upgrades to the latest wireless technology.
If that's indeed the case, Micron's addressable market will grow rapidly, as 24.1 million 5G smartphones were shipped in the first quarter of 2020, according to Strategy Analytics. Given that the chipmaker's annual mobile revenue growth of 104% through 2016 to 2019 has historically outpaced the overall industry's annual growth rate of 28% over the same period, Micron may be able to corner a sizable chunk of this market in the future.
The company's updated guidance has already provided us a glimpse that a turnaround is in progress thanks to improving demand-supply dynamics in the memory space. Now the transition to the new networking standard could give Micron an added boost, making it a 5G stock worth keeping an eye on.
