The global semiconductor market has seen continued growth in the last year. Although all the main products categories have achieved growth, the memory products have shown the highest growth according to the Semiconductor Industry Association (SIA). In my view, it is not surprising, as we all see from our experience, once we were satisfied with 16GB storage in our smartphone. However, now downloading or shooting large videos, keeping a lot of photos and music albums offered by Apple Music, a storage of 128GB seems too little. Also, the DRAM content in smartphones is increasing to be able to use more sophisticated applications and to work faster. In fact, the very popular iPhone 7 Plus, carries already 3GB of DRAM, a quantity that was seen in PCs before.
All this trend benefits Micron Technology, Inc. (NASDAQ:MU), the only American major memory chips producer.
Micron’s stock has outperformed the broad market and the PHLX Semiconductor Sector Index (SOX) in the last few years. In fact, since the beginning of 2012 MU’s stock has increased 346.1% while the SOX index has risen 194.2%. What’s more, year to date MU’s stock is up 28% compared to an increase of 18.3% of the SOX index. As such, investors might conclude that Micron has been outperforming the semi index in every year. However, that it is not so, in 2015 MU’s stock had fallen almost 60% while the semiconductor index SOX had lost only 3.4%, as shown in the chart below.
The reason for this is quite clear, Micron’s revenue and profit depend on the price of memory chips DRAM and NAND flash, and these types of chips are a kind of commodity with sharp movement in their price according to demand and supply.
Therefore, investors holding MU’s stock and potential buyers of the stock should, first of all, try to foresee if the price of memory chips would stay firm in the next few quarters. Right now, according to Micron, the positive pricing environment due to tight supply and high demand for memory chips is continuing.
In the past, the most of the use of DRAM, which accounts for about 60% of Micron’s revenue, were in personal computers. Although shipments of PCs in 2016 were stronger-than-expected, the PC market has declined in the last few years. However, the fast-growing mobile market has increased the demand for DRAM much more. Smartphones producers have increased the DRAM capacity in their new devices, as many new applications require bigger memory than in the previous devices. New DRAM products are being used in automotive for self-driving systems, in the fast-growing internet of things devices, in high-definition televisions and smartwatches and other wearable devices among others. As I see it, this trend is going to continue as mobile devices are getting more and more popular.
As such, it was not surprising that DRAMeXchange, a division of the research company TrendForce maintained on April 26, its view that DRAM prices will stay on an uptrend for the entire current year. According to the research company, besides the increasing demand for DRAM, the tight supply of these memory chips is continuing due to lack of major fab expansion plans, and also, due to yield issues with leading-edge processes.
Also, the same positive trend is continuing for the NAND flash memory market. NAND flash, which accounts for about 31% of Micron’s revenue, has seen a significant price increase of about 14% in the first quarter of 2017, and according to research companies, this trend will continue throughout the entire year. As in the case of DRAM, there is an increase in demand for NAND flash from producers of mobile devices smartphones and tablets among others. Also for NAND flash, there is tight supply mainly due to yet reduced yield in the production of 3D NAND flash. There is currently a transition in the technology of NAND flash from 2D to 3D flash which has caused a decline in the supply of 2D NAND flash.
Top analysts according to TipRanks have remained bullish on MU’s stock in the last few months. In fact, during the last month, five best-performing analysts have reiterated their Buy recommendation for MU’s stock. The average target price of top analysts is at $37.33 representing an upside of 28.6% over May 16 close price of $29.02. As a holder and follower of the stock for many years, I find this target price reasonable.
In my view, Micron Technology will continue to prosper due to the mobile revolution which requires higher memory capacity in smartphones, tablets, wearable devices and others. Also, the fast-growing internet of things devices, the high-definition televisions, the automotive self-driving systems all need higher memory capacity. As I see it, this trend is going to continue as the new applications are getting more popular. Even if the current issue of tight supply would be solved in the next few quarters, I believe that the increasing demand due to the new and more sophisticated applications will keep memory chips prices firm.
Disclusre: The author has a long position in MU’s stock.