In my previous article about Micron Technology, Inc. (NASDAQ:MU) from March 15, I underscored that the company is benefiting from better pricing environment due to tight supply and high demand for memory chips. Meanwhile, on March 23, the company reported better than expected earnings results and provided guidance for its third fiscal 2017 quarter, which was significantly higher than analysts’ estimates. As a result, MU’s stock soared 7.4% on the next trading day to $28.43, its highest value in two years.
According to the company, we can actually expect this trend of high demand and limited industry supply for DRAM and NAND flash memory chips to continue. In my view, the higher demand is not surprising when taking into account the new applications like artificial intelligence, internet of things and autonomous cars, which need large memory capacity to be able to operate.
Also, mobile devices are using now much higher memory chips capacity due to increasing use of photos and video content. However, why the industry supply is limited might surprise investors. Considering there has arisen an extended period of weak prices plaguing memory chips, companies have been reluctant to invest heavily in new production lines, and some producers have even abandoned the market.
Moreover, besides the high demand for its memory chips and better prices, the company has been able also to significantly reduce the manufacturing cost for both NAND and DRAM thanks to operational improvements.
Latest Quarter Results
Micron beat earnings per share expectations again in its second quarter fiscal 2017, this time by $0.04 (4.7%), after showing earnings per share surprise in its previous six quarters, as shown in the table below.
Net sales of $4.5 billion in the quarter were in-line with expectations. However, sales were 17% higher than in the previous quarter and 58% greater than in the same quarter a year ago. Micron explained that the increase in its net sales was primarily due to 21% rise in DRAM average selling prices, and 18% increase in NAND sales volumes.
Micron’ guidance for the third fiscal quarter was significantly higher than Wall Street’s estimates. The company expects adjusted earnings per share of about $1.50 compared to estimated earnings of $0.90 per share, and revenues of about $5.4 billion much higher than the Street’s estimates of $4.72 billion.
In my opinion, investors should be encouraged by the fact that Micron was able to increase its Non-GAAP gross margin to 38.5% compared to a Non-GAAP gross margin of 26% in the previous quarter and 20.4% in the same quarter a year ago. Moreover, the company expects a gross margin of about 46% in the current quarter. The gross margin which is observed with a large interest by analysts is a crucial parameter in semiconductor companies financial results, and such a significant increase indicates the improvement of Micron’s business.
To emphasize the vast improvement of Micron’s gross margin, let’s compare it with other leading semiconductors companies like Intel and NVIDIA. Although Intel’s Non-GAAP gross margin of 63.1% in its last quarter is much higher than that of Micron, it was less than its gross margin of 64.8% a year ago. What’s more, Intel expects a Non-GAAP gross margin for the current quarter of 63% which does not indicate any improvement. Also, the highflying NVIDIA has achieved just a small improvement in its gross margin; 60.2% in its last quarter compared to 59.2% in the previous quarter and 57.2% in the same quarter a year ago.
Top Analysts’ Opinion
According to TipRanks which measures experts (analysts and bloggers) according to their success rate, analysts see an average upside for MU’s stock of 26% to $35.94. It is worth noting that among the sixteen best performing analysts, fifteen analysts rate the stock as a Buy, as shown in the table below, which is quite unusual. Top analyst Rajvindra Gill of Needham even suggested a target price of $50 to the stock which is 75% higher than MU’s stock close price of $28.52 on April 7. As I see it, considering the favorable market conditions for memory chips, and the continuous growth in demand for data and storage, the average target price of $35.94 could be achieved in short time.
After delivering better than expected earnings results in its six previous quarter, Micron has surprised again in its last quarter reporting adjusted earnings per share of $0.90 a $0.04 higher than analysts’ average estimate. What’s more, the company was able to significantly increase its Non-GAAP gross margin to 38.5% from 26% in the previous quarter and guided a gross margin of about 46% for the current quarter, which is very impressive in my view.
Micron’s team does not spot an end in sight for the positive trend of high demand and limited industry supply for DRAM and NAND flash memory chips. As I see it, considering the accelerating growth of the request for data and storage by new applications, these favorable market conditions will continue steaming right along, which could drive Micron’s shares to soar meaningfully higher.
Disclosure: I am long MU stock.
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