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Stock Analyst Update

Micron: DRAM Market a Goldmine, Raising Fair Value

We modestly increased our fair value estimate due to superior near-term expectations, but shares are materially overvalued.

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 Micron (MU) reported strong fiscal third-quarter results consistent with its updated guidance from its analyst day on May 21, driven by a favorable pricing environment in both DRAM and NAND. We think the firm is well-positioned to benefit from greater memory and storage needs in cloud computing, artificial intelligence, the Internet of Things, automotive, the shift from HDDs to SSDs, and content increases in smartphones. However, we do not foresee the current favorable supply/demand dynamics and rational behavior of Micron's peers persisting beyond calendar 2018, as one of Micron's competitors such as Samsung, SK Hynix, or other storage suppliers could potentially ramp capacity to drive additional growth or steal market share. We are modestly increasing our fair value to $40 per share due to superior near-term expectations. Nevertheless, we think shares are materially overvalued at current levels.

Third-quarter revenue was $7.8 billion, up 6% sequentially, led by a 33% gain in cloud DRAM sales and record automotive revenue in the embedded business unit that was up 8%. DRAM sales rose 6% over the prior quarter to $5.5 billion, with the aforementioned server gains partially offset by lower PC DRAM revenue. Despite storage business unit sales falling 9% sequentially, we were pleased to see record SSD revenue, which accounted for the majority of SBU. NAND accounted for 25% of total revenue and rose 8% sequentially led by a 24% increase in cloud SSD sales. Gross margins rose to 60.6% from 58.1% last quarter, as Micron enjoyed solid ASP increases coupled with cost per bit reductions in both DRAM and NAND.

Fiscal fourth-quarter sales are expected to be at a midpoint of $8.2 billion, which implies a sequential increase of 5%. We think DRAM prices will begin to plateau, while industry reports have already noted NAND pricing declines, which we foresee impacting Micron’s NAND results during its fourth quarter.

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Abhinav Davuluri does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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