Micron: DRAM Industry Dynamics, In Recovery
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We continue to be buy-rated on $Micron Technology(MU)$ (NASDAQ:MU). We expect MU provides an attractive entry point for long-term investors, as we believe DRAM dynamics will improve toward the end of the year. DRAM still makes up most of MU's totalrevenue, accounting for69%; hence, our bullish sentiment on the memory company is deeply intertwined with our expectations for industry DRAM dynamics.
MU, SK Hynix, and Samsungdominatethe DRAM market, with MU retraining a market share of nearly 27% as of the third quarter of 2022. The semiconductor market has suffered a significant collapse in demand over the past year; revenue from the sale of memory chips, which make up25%of all semiconductor sales, was down 10% globally last year, according to Gartner. We believe OEMs have built up significant inventory from excessive pandemic-led demand and now face weaker consumerspending in the post-pandemic environment. We're more constructive on MU now than we were a year ago, as we expect the worst of the DRAM demand weakness and customer inventory correction to be washing out toward the second half of the year. The following graph outlines our rating history of MU over the past year.
Seeking Alpha
We continue to expect MU's financials to be pressured in the near term due to the negative DRAM and flat NAND growth. We believe the stock price remains volatile in 1H23. Still, we expect MU's rebound is slowly but surely materializing alongside the broader DRAM industry, and recommend long-term investors begin to look for entry points on the stock at current levels.
DRAM industry dynamics: in recovery
Our bullish sentiment on MU is based on our expectations that DRAM industry dynamics are in recovery mode toward the end of the year. Last year was rough for the semiconductor industry, to say the least; Gartner's global semiconductor report showed the sector growing1.1%in revenue in 2022, compared to a 26% Y/Y revenue growth the year before. We expect 2023 to be a year of working through DRAM demand weakness and inventory correction cycles. We expect DRAM industry dynamics to recover on three fronts:
1. Inventory correction wrapping up toward 2H23
While the stock price remains volatile in the near term, we believe MU is rebounding from the harshest imbalance between supply and demand on DRAM and NAND fronts in the past decade. We're more constructive on MU now, as we expect MU's customers are reducing their inventories to "relatively healthy levels by mid-calendar 2023", as worded by MU CEO Sanjay Mehrotra. We expect MU's demand to improve in the second half of the year as the market's supply-demand balance resorts.
The following table outlines MU's revenue growth since 1Q22.
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MU announced in its 1Q23 report that it would reduce memory chip supply and cut CapEx spending to aid in the excess inventory built up over the past year. Chipmakers and electronic companies had boosted supply for pandemic-led demand surges and found themselves with an overstocked inventory in the post-pandemic environment. We believe MU's efforts to shrink DRAM supply and cut CapEx will aid in inventory correction cycles; MU announced it would reduce its DRAM and NAND wafer starts by20%compared to its last quarter. We don't believe the CapEx cuts are a warning sign. Instead, we believe they are a sign that MU is on the right path to recovery.
2. DRAM weakness priced in
Ourpreviousnote on MU focused on our belief that current consumer and data center weaknesses have been priced into the stock. We continue to expect the grunt of the weaker DRAM demand has been priced into both the stock and the outlook for next quarter. We believe DRAM demand will rebound toward the second half of the year, while NAND may lag a bit. We believe DRAM suppliers' cut of CapEX spending for the 1H23 will help put DRAM supply-demand dynamics to regain balance. SK Hynix reported it would cut its CapEx byat least halffor 2023 after reporting its biggest quarterly loss on record. The company's most recent quarter reported significant operating lossdueto "weak demand and a sharp fall in memory-chip prices." Samsung's 4Q22 reported asevere profit drop, further confirming the narrative that the worst of weak DRAM demand has taken its toll on memory companies, and the DRAM industry is collectively closer to recovery as MU and SK Hynix, and, hopefully, Samsung cut CapEx spending and reduce supply. We believe the DRAM industry is at an inflection point and expect DRAM supply-demand dynamics to recover toward the year's end.
3. Ramping up DDR5 volume
MU ramping up its DDR5 volumes is part of our bullish sentiment. Why does ramping up volumes matter amid weak DRAM demand and inventory correction cycles? DDR5 (Double Data Rate 5 Synchronous DRAM) is the successor of DDR4, delivering up to twice the memory bandwidth of older generations. We continue to expect MU ramping up volumes of DDR5 will serve as a growth driver for MU in the long run. We expect adoption of DDR5 memory to increase toward 2H23, specifically as it's employed for new-generation processors from Intel (INTC) and Advanced Micro Devices (AMD). We believe MU is eyeing the growing demand opportunities in the next-generation memory standard. DDR5 has reached a market share of20%, and it's expected to climb further this year as memory prices fall due to current macroeconomic headwinds.
What does this mean for MU's financials?
We continue to believe the macroeconomic headwinds will pressure MU's financials in 1H23 due to negative DRAM and flat NAND growth. We expect profitability to remain challenging for MU during 1H23 as the company still works through 2022's macroeconomic headwinds spilling into this year; both Gartner and World Semiconductor Trade Statistics (WSTS) expect a contraction in semiconductor revenue growth this year. We believe the semi-space is "polarized" between consumer and enterprise markets, and we expect to see the latter recover faster toward 2H23. The near-term outlook for MU remainsgrim; the company's 1Q23 quarter came in slightly below expectations, and the outlook for 2Q23 is well-below expectations at $3.8B versus the consensus of $3.84B. Hence, our bullish sentiment is for the long-term investor; we expect investors buying MU stock at current levels will be rewarded toward 2024. We believe MU is well-positioned to rebound as DRAM industry dynamics return to balance and as MU ramps up DDR5 production.
Valuation
MU is relatively cheap, trading well below the peer group average. The stock is trading at 3.4x EV/C2023 sales, versus the peer group average of 5.3x. We believe the worst of the macroeconomic headwinds have been priced into the stock. We recommend long-term investors begin looking for stock entry points at current levels.
The following tables outline MU's valuation compared to the peer group.
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Word on Wall Street
Wall Street shares our bullish sentiment on the stock. Of the 37 analysts covering the stock, 24 are buy-rated, ten are hold-rated, and the remaining are sell-rated. We believe MU is well-positioned to benefit from the recovery of DRAM supply-demand dynamics toward the end of the year as it ramps up DDR5 volumes.
The following table outlines the company's sell-side ratings.
TechStockPros
What to do with the stock
We continue to be bullish on MU. We believe the stock provides a favorable risk-reward profile for long-term investors at current levels. We expect MU's financials to continue under pressure during the first half of the year but expect the stock to rebound more meaningfully toward the end of 2H23 as inventory correction and weaker DRAM demand wash out. MU stock is trading nearly 19% higher than its 52-week-low of $48.43. We expect the stock remains volatile in the near term but believe MU is addressing excess inventory supplies and weaker DRAM demand head on and hence believe the company is on the right track to regain profitability toward the end of the year.
Source: Seeking Alpha
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