In this week's Barron's Magazine Paul Wick (as part of the annual roundtable) picks Micron:
Wick: I’ll start off with some long ideas in semiconductors. Micron Technology [ticker: MU] reported earnings a few weeks ago. The company significantly exceeded expectations. It is growing revenue by more than 50% a year. In fact, over the past couple of years, revenue has grown by more than 100%. And Micron’s profit margins have expanded significantly. Operating margins are now in the high-40% area.
What has been driving margins up?
Wick: Partly, the cost to add new leading edge capacity has gotten so high that people aren’t adding new capacity as easily as in the past. You can’t just buy a new lithography tool, turn it on, do a node shrink, and have 30% or 40% more bits anymore. Now you get 10% more bits, or at most 15% more bits.
There are three main players in DRAM [dynamic random access memory]: Micron, Samsung Electronics[005930.Korea], and SK Hynix [000660.Korea]. In NAND flash [used for storage in smartphones and laptops], Samsung is No. 1, with Toshiba [6502.Japan] and Western Digital [WDC] close behind, followed by Micron and Hynix again. Intel [INTC] is peripherally involved, mostly through a joint venture with Micron. A few years ago, Micron got behind the curve manufacturing-wise. It caught back up, and that is one reasons margins have exploded.
How has the memory industry evolved?
Wick: If you think back to 20-odd years ago, the DRAM industry was all about PCs—new operating systems and new Intel processors. Now, PC DRAM is only about 20% of demand. The demand drivers are much more diverse. Mobile phones are 20%. Servers and data centers are probably 25% to 30%. Then there’s TVs and consumer electronics; it is getting really pervasive. Even automobiles have meaningful memory content.
The demand from cloud data centers is inelastic because people with high-margin businesses like Google or Facebook[FB] don’t really quibble about the cost of memory. It’s not like Dell Computer 25 years ago; it would have killed to save 10 cents on a DRAM module. Micron is earning about $11 to $12 a share per year. The stock is about $45, which means people don’t think the good times are going to last.
Why do you think they will continue?
Wick: I don’t know whether the current degree of profitability is sustainable, but we aren’t going to get down to a cyclical low with the companies losing money again. The balance sheet has been cleaned up. Micron generated $1.7 billion in free cash flow in the latest quarter. The annualized free cash flow is about $7.5 billion to $8 billion. The enterprise value is about $53 billion. There is a little more delevering to come. They’ll probably pay down another $2 billion or so of debt and then announce a meaningful share repurchase and capital return later in 2018.
What could Micron earn at the cycle trough?
Wick: That’s hard to say—I’d guess $4 a share or thereabouts.
Oscar Schafer: Regarding timing, will people buy the stock once the cycle starts down?
Wick: These stocks could get rerated dramatically higher. Things like artificial intelligence and autonomous cars are going to require a vast amount of memory. Yet the perception is that we still have the memory market of 15 or 20 years ago. The key thing is that the cost of new capacity has tripled in five years, and that changes everything.
Micron has a great CEO, Sanjay Mehotra, who had been CEO of SanDisk. He inspires confidence. The stock could be $60, $70, $80 over the course of the next year. I like the risk/reward, and if I’m wrong, it doesn’t go down a lot.
The last paragraph has incredible price targets!!!!! |
