Chipmaker Micron Technology (NASDAQ:MU) is executing solidly in a positive environment for memory chips. This is clearly seen in the company's second-quarter results that were released last week. Micron continues to remain upbeat about the industry's dynamics due to solid demand from smartphone and tablet customers, along with solid-state drives.
Also, since the company is now a supplier to Apple (NASDAQ:AAPL) post its Elpida acquisition, it wasn't a surprise to see Micron speak highly about the growing use of DRAM and NAND memory in mobile products. The stock has shot up an impressive 150% over the past year, and with the way things stand, Micron seems to have more upside in store going forward. In addition to robust end markets, Apple's rumored A8 could keep Micron on the path to growth.
End-market dynamics remain positive
Micron's stellar performance in the past few months has been helped by a fire at rival SK Hynix's Wuxi fab facility in China that led to a supply shortage in the industry. However, production at Wuxi is now normal; but even then, the dynamics of the industry aren't going to change dramatically since supply will be kept under control to support pricing.
Micron expects DRAM industry wafer production to decline in the mid-single digits this year. In fact, Micron itself will play an important part to control supply in the industry as it is converting some of its DRAM production facilities to NAND.
This is a smart move on the company's part since a declining PC market could lead to uncertainty in demand for traditional DRAM chips. However, the use of DRAM in mobile is rising. As such, Micron expects DRAM demand to grow at a robust annual rate of mid 20% to 30% for the next five years.
The global mobile DRAM market is slated to grow at a compounded annual growth rate of 10.4% till 2018 , and Micron has the right customer to benefit from this expected growth in the form of Apple. Apple has tapped Elpida for mobile DRAM in the last two iPhones.
Now, Apple is rumored to bring out the A8 processor to succeed the current A7 chip. As reported by pocketnow.com, Apple's A8 will integrate a processor and mobile DRAM in the same package. This mobile DRAM is expected to be built using a 20-nanometer technology, and this is exactly what Micron has been testing right now.
Micron is migrating from a 25-nanometer process to a 20-nanometer process in DRAM with a view to tap mobile and server customers. Moreover, the shift to a 20-nm process will also bring down costs and enhance Micron's margins further.
In the NAND business, Micron expects the growing application of solid-state drives in computing applications to be a tailwind. Also, NAND chips are used in data centers and other memory products such as memory cards, USB storage devices and embedded consumer products, where Micron is seeing an uptick in demand. The market for NAND products is expected to remain strong this year, with TrendForce projecting 13.3% year over year growth to $28 billion.
Upbeat forecasts in both of Micron's end-markets suggest that the company's outstanding financial performance should continue going forward. But the good thing is that the stock is pretty cheap even now despite solid gains in the past year. Micron has a trailing P/E ratio of just 14, while on a forward P/E basis it is even cheaper at under 8 times earnings.
To put things in perspective, Micron's revenue almost doubled year over year in the previous quarter, and it posted a profit of $0.85 a share as against a loss of $0.28 per share last year. Of course, Micron is enjoying the benefits of the Elpida acquisition, leading to such solid growth numbers. But even then, the stock is quite cheap, more so because Micron's bottom line is expected to grow in the double digits for the next five years.
The bottom line
Positive trends in the DRAM and NAND industry should continue driving Micron higher going forward. In addition, the stock is still cheap relative to its growth, making it a growth at a reasonable price opportunity.