Micron Will Likely Beat On Earnings - Seeking Alpha

Introduction

The key to estimating Micron's (MU) earnings lies within assessing the DRAM and NAND market. The most straightforward way of doing this is to look at the prices. Industry consolidation and an increasingly technology-reliant world have reduced the volatility and thus cyclicality of the market. I expected the industry to continue to become less cyclical as we start to live in a more Internet of Things world. This secular trend should continue to stabilize the uptrend in DRAM and NAND pricing. I expect MU to report an earnings beat next week.

Extreme cyclicality argument is being dismantled

Many have argued that the primary reason for not buying MU despite its low valuation, is its extreme cyclicality. This argument has been widely spread around by analysts in the past. Now, even analysts are starting to come around:

“It is different this time. It's very rare, one of our top 15 axioms of semi-interesting is very rarely is it's different this time, but it is different this time. This is not your grandmother's Micron.

The industry is better. We've had massive consolidation in DRAM and more importantly, the company is better.” Chris Danely – Citi Analyst

And in a Seeking Alpha news release, we find

“Analyst C.J. Muse sees the current DRAM cycle as sustainable due to improving demand paired with acceleration in storage and processing, constricted supplies due to rising complexity, and bit growth reduction due to shrinks.“

Of course, the company’s executives have been saying this for quite some time. In early September, the CFO repeated his view on the market dynamics:

“Well, I think first of all, you have to look at the demand market and demand environments and certainly the collection and use of data and the rate at which the collection and use of data is expanding and as you think about applications like autonomous driving and artificial intelligence, so every single thing we contemplate that's driving the economy, the future is reliance on data.”

This thinking is in-line with the argument presented by the Evercore analyst or I should say that the analysts thinking is now finally in-line with that of the industry. The CFO goes on to state that the consolidation was indeed a big part of creating a less cyclical market environment:

“Relative to the supply side, I do think consolidation has been very instrumental in having a disciplined and orderly expansion of supply. We have certainly seen that now over period of a couple of years and we expect based on everything that we can see that you're going to continue to have a disciplined expansion of supply as we look forward into fiscal '18 for Micron.”

So, basically, we are increasingly using products and services that require the processing and storage of data. Many of these products are increasingly becoming everyday items and this in turn leads to less volatility in the demand for DRAM and NAND. Of course, this is not to say that the industry can be compared with utilities but the point should be clear.

Another factor in estimating MU’s earnings is the fact that the Micron N2 fab had been temporarily suspended as a result of a contamination:

""The DRAM market in the second half of this year will be entering the busy season with tight supply made worse by the temporary suspension of N2 (Fab-2) owned by Micron Technology Taiwan," said Avril Wu, research director of DRAMeXchange. Micron Technology Taiwan was formerly known as Inotera before Micron's acquisition.

The Micron N2 fab suffered a contamination event caused by malfunctioning gas equipment at the start of this July and halted production for two weeks for the cleanup. The facility has resumed normal operation since mid-July.

DRAMeXchange estimated that just over 20,000 wafers were ruined by the contamination, and the total wafer starts at the N2 fab were cut by about 30,000 wafers during the two-week suspension. In total, the fab lost around 50,000 wafers for the manufacture of DRAM chips.“

However, relatively speaking, this is quite manageable. Also, the impact of this will be offset by higher prices due to the lower supply. Already, it is estimated that bit demand will be outgrowing supply. Demand is estimated to increase by 22% in 2017 while supply is estimated to grow by 19.5%.

In conclusion

I expect MU to post an earnings beat. I believe that MU will report an EPS that is at least $0.10 higher than current expectations as DRAM prices continue their steady uptrend.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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