Source: Beast Finance Author: Beast Finance
Micron Technology (MU) is the fourth largest semiconductor company in the world and the third largest supplier of dynamic random access memory (DRAM). Micron's products are needed in all computing infrastructures, from ordinary PCs to data centers.
So, as the world continues its digital transformation, Micron stands to benefit as well.
According to a study by McKinsey, by 2030, the market size of the semiconductor industry will reach 1 trillion US dollars. While the industry is currently going through a severe downturn, history shows that this is only cyclical.
Micron Technology is also poised to benefit from growing trends in the artificial intelligence industry. According to Micron's management, an average AI server uses 8 times the DRAM capacity of a traditional server, and Micron's NAND products are three times that of a traditional server. Micron is thus well positioned here as well, but the market seems to be ignoring this as its stock is down over 39% from its January 2022 high.
In this article, Boldbeast Finance will comprehensively analyze Micron Technology’s financial performance, market size, opportunities in the field of artificial intelligence, products, profits and balance sheets, valuations, forecasts, and risks. "Overlooked and undervalued investment opportunities" in artificial intelligence.
Financial performance
Micron Technology’s revenue in the second quarter of fiscal 2023 was US$3.69 billion, which was US$13.63 million less than analysts’ forecasts, and a year-on-year decrease of 52.6%. At first glance, this may not seem like much, but we should remember that after previous booms, the memory and semiconductor industries are currently experiencing a period of low demand, which may even lead to shortages in the second half of 2021. The good news is that this industry is a cyclical one, so we don't see this as a permanent problem.
By business, Computing and Networking Business (CNBU) revenue was $1.375 billion, down 60% year-over-year. Because the PC industry is going through the aforementioned cyclical downturn, but on a positive note, Micron's management expects demand for computing to increase in the second half of 2023. It's worth noting that a lot of people are chasing Nvidia (NVDA) stock right now because of its massive strength in high-performance graphics cards (GPUs) and artificial intelligence. However, we found that Micron's 16GB GDDR6X (the world's fastest discrete graphics memory released by Micron in September 2020) is a key component of Nvidia's GeForce RTX 4080 GPU.
Source: Micron Technology's financial report for the second quarter of fiscal year 2023
According to a report by PricewaterhouseCoopers, the scale of the global game industry will reach US$235.7 billion in 2022 and is expected to reach US$321.1 billion by 2027. So, as the gaming industry rebounds (and continues to grow), Beast Finance expects Micron to benefit.
Source: PwC
Opportunities in the field of artificial intelligence In terms of
artificial intelligence, Micron Technology has DDR5 RAM products specially designed for data centers. Compared with the previous DDR4, the system performance has increased by 85%. The product is also specifically designed to maximize the performance of high-performance computing, big data and artificial intelligence workloads. Micron's CFO believes that its data center business revenue has "recovered" in the current quarter (Q2FY23) and should see sequential improvement through the remainder of the year. By the end of 2023, the company expects customer inventories to return to "healthy levels." This expected rebound is driven in part by the huge growth of the artificial intelligence industry.
An AI server can have up to 8x the DRAM capacity and 3x the storage. This is because AI workloads tend to consume more memory. Therefore, Micron Technology will also benefit from the artificial intelligence trend.
The product is also 36 percent more efficient, according to Micron. In a recent media interview with Bill Gates and Microsoft's (MSFT) artificial intelligence chief technology officer, Bill Gates said that improving the efficiency of artificial intelligence is a "big challenge" and an opportunity for many companies. So Micron is right in the middle of this trend in artificial intelligence, which is a positive for it.
In terms of AI products, Micron is also working on its third-generation high-bandwidth memory products (HBM3) to benefit from the growing trend of AI. Competitors Samsung and SK Hynix are not leading in this regard. Although SK Hynix has provided Nvidia with the industry's first HBM3 product in 2022, and Samsung's Icebolt product has begun mass production, Micron Technology has also begun mass production and shipment of its fastest PCIe Gen4x4 NVMe SSD products Yes, this SSD has high performance for AI and HPC workloads.
In terms of industry growth trends and investment opportunities, although the cloud computing industry will have a market size of US$480 billion in 2022, it is expected to grow rapidly at a compound annual growth rate of 19.9%, reaching US$1.7 trillion by 2029.
Mobile business is recovering
In terms of mobile business, Micron Technology’s revenue has also begun to recover. In the second quarter of fiscal year 2023, mobile business revenue reached US$945 million, a 44% quarter-on-quarter increase despite a 50% year-on-year decrease. Management expects full-year customer inventory to improve, and shipments of DRAM products and NAND products are also expected to increase in the second half of fiscal 2023.
In the embedded business, Micron's revenue hit $865 million in the second quarter of fiscal 2023, down 14% sequentially, so it doesn't appear to have fully recovered yet. This was largely driven by the above-mentioned weakness in the consumer market. However, this was partially offset by a roughly 5% year-over-year increase in revenue from its automotive business. Beast Finance has a lot of hope for Micron's auto sector, as companies like Nvidia and Qualcomm (QCOM) have reported that it's their fastest-growing business (by percentage).
In terms of storage business, Micron Technology’s revenue in the second quarter of fiscal year 2023 was US$507 million, a 25% quarter-on-quarter decline, due to the weak NAND market, which led to a decline in average selling price of about 20%. But on the positive side, that slightly offset the mid-single digit to high percentage range growth in shipments. So, it's an indication that demand for storage products has started to recover, but there's an oversupply in the industry, and that's going to take a while to sort out.
Another positive for Micron is that the company is the first in the industry to launch QLC NAND products, which accounted for about 20% of Micron's total production of all products as of the second quarter of fiscal 2023 . This is important because QLCNAND products offer greater storage density, lower cost, and faster read speeds than previous architectures such as TLC. In other words, Micron's products can be "better, faster and cheaper" than its competitors, which is the main selling point of most of its products.
Source: Micron Technology's financial report for the second quarter of fiscal year 2023
Profit and Balance Sheet
In the second quarter of fiscal 2023, Micron's gross margin was negative 31.4%, a sharp drop from positive 48% in the same period last year. This was primarily due to a $1.4 billion inventory write-down. The only good news is that this is a "non-cash" writedown due to the expected sales price being less than the cost of inventory. The company also reported a significant operating loss of $2.1 billion, which was also impacted by the aforementioned inventory writedown. On a positive note, Micron's overall operating expenses actually decreased by about $80 million to $916 million in the second quarter and fiscal 2023, as management has made cutting costs as much as possible a strategic priority.
Source: Micron Technology's financial report for the second quarter of fiscal year 2023
Micron's cash flow in the second quarter of fiscal 2023 was $343 million, down from $943 million in the previous quarter. Micron Technology announced that it will cut capital expenditures for the entire fiscal year of 2023 by 40% to US$7 billion. The company is currently reducing the production of DRAM products and NAND products to help improve supply. The good news is that other players in the industry are also cutting production, which could lead to a faster recovery in 2024.
On the balance sheet, Micron posted $12.1 billion in cash and investments and increased liquidity, adding $1.9 billion in long-term debt, bringing total debt to about $12.3 billion. While in the longer term this should be greatly influenced by the high interest rate environment, we view this as "short term" (until inflation is subdued) as the majority of Micron's weighted debt is due in 2029, So its balance sheet is pretty solid in that regard.
Valuation and Forecasts
To value Micron Technology, we incorporated its latest financial data into our discounted cash flow valuation model. In the model, we forecast Micron's revenue growth to be negative 30% "next year," or the next four quarters. This is expected to be driven by lower demand (and high inventories), but this should start to improve in the second half of calendar year 2023. This is also in line with management's forecast for DRAM product sales growth of 5% but lower than 10% growth in 2023. As mentioned earlier, cloud computing business revenue seems to have bottomed out in the second quarter of fiscal 2023, so it is expected to rebound completely by the end of this year.
Looking at the historical data of Micron Technology, we found that Micron Technology's revenue often has two years of business growth, and then two years of positive growth. This is normal for a company in a cyclical industry. Looking at the data, Micron seems to be in the "cycle process" right now, so another 18 months of negative growth before a strong recovery is not surprising.
In years 2 to 5, we forecast Micron's growth to rebound by at least 11% annually, which is similar to its FY 2022 (quarter ending September 2022) growth rate. Given industry trends (artificial intelligence, cloud computing, automotive business), we wouldn't be surprised if Micron could post a growth rate of 50% or faster in the next rebound cycle. However, we tend to be more conservative when valuing companies.
To improve valuation accuracy, we capitalized Micron Technology's R&D expenses, which boosted its net income. In the short term, we expect Micron's margins to remain challenged as oversupply will keep ASPs depressed. Management expects a further inventory writedown of approximately $500 million in the third quarter of fiscal 2023. The good news is that the company is aggressively cutting costs and raising its headcount reduction target from 10% to 15%. Management is guiding for operating expenses of less than $850 million in Q4 FY2023, which would be a further improvement from Q2 FY2023 ($916 million).
Handy at operating margins, we forecast Micron to grow 30% over the next 10 years. That may seem bold, but it's really just back to fiscal 2022 margins (around 32% in fiscal 2022).
Taking these factors into account, we calculate a fair value of $80 per share for Micron Technology, which trades at $60.340 per share at the time of writing, making Micron Technology undervalued by more than 26% by our conservative calculations.
Micron Technology currently trades at a P/E ratio of 10.64, which is 23% below its 5-year average. And compared with its semiconductor industry peers, this metric is also on the low end.
Recession/cyclical demand
Many analysts predict a recession in 2023, but it is expected to start later than initially expected. As a result, the cyclical downturn in the semiconductor industry may last longer than initially expected.
in conclusion
Micron Technology is a huge technology company that will benefit from demand for DRAM products and NAND products driven by computing, cloud and artificial intelligence. While the company is facing the headwinds of a cyclical downturn in the industry, over the long-term it is poised to rebound stronger than ever. Our valuation model and forecasts also suggest that Micron is intrinsically undervalued, and we think owning Micron is a great long-term investment.