To The Moon

Micron Technology, Inc. 10-K (2021) and 10-Q (2022) Report Takeaways and Investing Analysis: (NASDAQ:MU)‌

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Highlights

·DRAM and NAND technology is the leading component in the semiconductor industry.

·Simple Business Model: It’s all about Data

·Core Product functions

·Competitor Analysis

·Risk of Investing in Micron

1. Business Overview:

·Micron’s core products: DRAM, NAND and NOR memory and storage products.

·Innovation and creation are key components of their business.

·Expanding and focusing on industrials and automobiles industry.

2. Product Technologies

What are their products being used for?

·Data Centre

·PC & Graphic

·Mobile & Intelligent Edge

Who are their market audience?

There are four main segments that generate revenue for Micron.

·Compute and Networking Business Unit (CNBU) includes memory products and solutions (DRAM) sold into client, cloud server, enterprise, graphics, and networking markets.

·Mobile Business Unit (MBU) includes memory products sold into smartphone and other mobile-device markets and includes discrete NAND, DRAM, and managed NAND.

·Storage Business Unit (SBU) includes SSDs and component-level solutions sold into enterprise and cloud, client, and consumer storage markets and discrete NAND sold in component and wafer forms for usage in various markets.

·Embedded Business Unit (EBU) includes memory and storage products sold into industrial, automotive, and consumer markets.

*Bold words are Micron’s market audiences

What functions can they provide to consumers?

CNBU

Functions: Micron were the first to introduce products built using 1α DRAM process technology, which offers major improvements in bit density, power, and performance.

Examples:

Cloud servers supporting artificial intelligence and data-centric workloads require significantly increasing quantities of DRAM and, as the number and capabilities of these intelligent edge devices increase, more data is stored, processed, and accessed in the cloud, creating a virtuous cycle between the cloud and edge devices.

Enterprise: In 2021, Micron transitioned to DDR5, which doubles bandwidth and reduces power consumption

Graphics: Micron introduced their GDDR6X graphics memory, which delivers unprecedented speed and bandwidth for high-performance graphics and computing.

Graphics products are incorporated into game consoles, PC graphics cards, and graphics processing unit-based data centre solutions, which are the driving force behind applications such as artificial intelligence, virtual and augmented reality, 4K and 8K gaming, and professional design.

GDDR6X products feature innovative signal transmission technology enabling the industry’s fastest GDDR for compute and graphics workloads.

Networking: consists primarily of DDR4 and DDR3 DRAM products. In 2021, demand was driven, in part, by increased 5G build-out in certain geographic locations to further support the growth of the advanced 5G networking infrastructure.

MBU

Functions: combines high-performance, high-density, and low-power memory and storage in one compact package, equipping smartphones to handle data-intensive 5G workloads with dramatically increased speed and power efficiency.

Example:

Smartphone: consists primarily of LPDDR4, LPDDR5, and managed NAND solutions. High-end smartphones incorporate higher levels of NAND and LPDRAM that enable features such as larger 4K displays, multiple high-resolution cameras, and 4K high-dynamic range video recording.

Additionally, Micron’s smartphone products are utilised by OEMs to enable artificial intelligence, augmented reality, and life-like virtual reality capabilities into high-end phones, including facial and voice recognition, real-time translation, fast image search, and scene detection.

SBU

Functions: The low cost per bit of their NAND QLC technology enables Micron to offer SSD products at a price point (affordable), which drives accelerated replacement of hard disk drives in a number of market segments.

Example:

SSDs: SSD storage products incorporate NAND, a controller, and firmware and offer significant performance and features over hard disk drives, including smaller form factors, faster read and write speeds, higher reliability, and lower power consumption.

Enterprise and Cloud SSDs: consists primarily of their 5210, 5300, 7300, and 9300 series SSDs. The enterprise and cloud storage markets are driven by the growth of applications that store, access, and analyse data in the cloud. Applications such as artificial intelligence servers require fast access to data with low latency, predictable performance, and high storage capacities.

Client SSDs: consists primarily of their 2300 and 2210 series client SSDs. Micron’s client SSDs, targeted for leading personal computer OEMs, have mostly replaced hard disk drives used in notebooks, desktops, workstations, and other consumer applications, and deliver high performance, power efficiency, security, and capacity.

Consumer SSDs: consists primarily of Crucial-branded MX500 and BX500 SATA SSDs and P1, P2, P5, and P5 Plus PCIe SSDs, which utilises their NAND QLC and TLC technologies. Micron expanded their consumer portable SSD portfolio by introducing the high-capacity 4TB and value-priced 500GB Crucial X6 external SSDs to offer consumers more options for external storage performance, capacity and value at any price point.

Their consumer SSD solutions are replacing installed hard disk drives as end users and system builders/integrators seek the higher performance, power savings, and reliability of SSDs.

EBU

Functions: Micron embedded products enable edge devices to store, connect, and transform information in the internet of things (“IoT”) market and are utilised in a diverse set of applications in the automotive, industrial, and consumer markets.

Example:

Industrial: EBU consisted primarily of DDR4 and DDR3 DRAM, LPDDR4 DRAM, SLC NAND, NAND MCPs, and NOR. Micron products enable applications in the growing industrial IoT market, including machine-to-machine communication, factory automation, transportation, surveillance, retail, and smart infrastructure.

Automotive: Micron also began sampling the industry’s first UFS 3.1 solution for automotive applications. Advancements in autonomous driving, advanced driver-assistance systems, and in-vehicle infotainment systems continue to increase the requirements for high-performing memory and storage products, with higher reliability requirements for leading-edge products.

Automotive memory and storage products enable connected, advanced infotainment systems with increasingly larger and higher definition displays and support improved voice and gesture control. In addition, their products enable increasingly advanced vision and sensor based automated systems to support driver assistance solutions and vehicle safety.

Consumer: consisting primarily of LPDDR4 DRAM, DDR3 DRAM, and SLC NAND. These embedded memory and storage solutions are used in a diverse set of consumer products, including service provider and IP set-top boxes, digital home assistants, digital still and video cameras, home networking, ultra-high definition televisions, and many more applications.

Micron embedded memory and storage solutions enable edge devices in the consumer products market to store, connect, and transform information in the IoT.

3. Competitive Conditions

Main competitors in this industry:

Micron faces intense competition in the semiconductor memory and storage markets from a number of companies, including Intel; Kioxia Holdings Corporation (formerly Toshiba Memory Corporation); Samsung Electronics Co Ltd; SK hynix Inc.; and Western Digital Corporation.

I have identified Intel and Samsung as Micron’s main competitors Mainly because they have huge resources and their financial statements are healthy compared to the other competitors.

2021

The table shows that

Intel: YoY growth is 6.2%, Net Income is positive, Diluted EPS is great (4.86), Generate FCF, only downside is that their total debt is high.

Samsung: YoY growth is 7.82%, Net Income is positive, Diluted EPS is great (4.85), Generate FCF, Negative Net Debt.

Micron: YoY growth is 14.65%, Net Income is positive (though Intel and Samsung earns more), Diluted EPS is (5.14), Generate FCF, negative Net Debt.

My opinion: Putting valuation aside, Micron’s financials are clearly favourable compared to Intel and Samsung. Intel's total debt is high, which makes me wary of the fact that they might be unable to pay off their debt in the long term, which could lead to bankruptcy if the liabilities continue to greatly exceed their assets.

On the other hand, Samsung has products spanning many categories such as Energy, Smartphones, TV consoles, etc. that contribute to their revenue, which peaked at a future growth rate of 7%. In comparison, Micron produces top cutting edge products and achieved a leading status in the memory and storage, allowing their business to grow at a future rate of 14% per annum in the next few years. However, further assessment over the next few years is still vital as potential investors need to be aware of any signs of declining growth.

4. Risks of investing in Micron

Competitors have large resources:

Some of Micron’s competitors are large corporations or conglomerates that have greater resources to invest in technology, capitalise on growth opportunities, and withstand downturns.

With their large resources, some of Micron’s competitors might generally seek to improve yields, by reducing their size in product designs, or increase production capacity, which may result in significant increases in worldwide supply and put downward pressure on prices. This might cause Micron to lose their leading status in memory and storage products due to competition of price rather than producing cutting-edge technologies.

My opinion: I agree with this risk condition somewhat, as Intel and Samsung have larger resources as compared to Micron, as such, they are able to compete more fiercely in terms of supplies and prices. However, due to the pandemic, Micron has changed to long term contract agreements with their business counterparts, therefore this will not affect Micron in terms of supplying and pricing against their competitors in the long run.

Increasing Capex and not improving/producing cutting edge products:

Micron’s competitors may increase their capital expenditures resulting in future increases in worldwide supply. If the competitors are more successful at developing or implementing new products or process technologies, their products could have cost or performance advantages (e.g. Samsung partners with Red Hat to develop next generation memory-related software).

Some of Micron’s memory and storage products are manufactured to industry standard specifications and, as such, have similar performance characteristics to those of Micron’s competitors. For these products, the principal competitive factors are generally price and performance characteristics including operating speed, power consumption, reliability, compatibility, size, and form factor. Some of their competitors may use aggressive pricing to obtain market share or take business from Micron’s key customers.

My opinion: This is a major risk factor for Micron, as their core products are mainly DRAM. If Micron’s DRAM does not improve or the company does not introduce better products to the market, it would spell trouble for Micron’s current DRAM products. There is a growing consensus that the business is declining and Micron is not about to compete effectively. As this is a major risk factor that I will keep a close watch for in the future.

Geopolitical Risk:

Some governments may provide, or have provided, and may continue to provide, significant assistance, financial or otherwise, to some of Micron’s competitors or to new entrants and may intervene in support of national industries and/or competitors. In particular, Micron faces the threat of increasing competition as a result of significant investment in the semiconductor industry by the Chinese government and various state-owned or affiliated entities that are intended to advance China’s stated national political objectives.

In addition, the Chinese government may restrict Micron from participating in the China market or may prevent them from competing effectively with Chinese companies. Some competitors may benefit from policies and regulations that favour domestic companies or may not be subject to certain regulations or restrictions, which may allow them access to sales opportunities which Micron may be restricted from. In addition, Micron’s customers may redirect their business to other competitors based on government policy, national preference, or other factors.

My opinion: I agree, although the chances are slim. However, such macro events are not within Micron’s control. Although Micron has stated in their shareholder letter, they will mitigate geopolitical risk to its operation, by intending to invest more than $150 billion over the next decade in leading-edge memory manufacturing and research and development (R&D), including U.S expansion. However, if that doesn't help to minimise the geopolitical risk. It will no doubt affect Micron’s revenue growth and thus, If this happens, I will re-analyse and might change the price target of Micron.

Cease their Buyback Program:

Stock buybacks are known to increase equity value, preserve/increase stock price when share prices are undervalued and make financial statements look more attractive. As Micron continues to generate free cash flow year-on-year, excess cash not being used is quite costly to business growth in the long run. Hence, buyback programs help to grow stock prices in the long term if executed properly.

Since 2018, the Board of Directors has shifted to authorising the discretionary repurchase of Micron’s outstanding common stock through open-market purchases, block trades, privately-negotiated transactions, derivative transactions, and/or pursuant to a Rule 10b5-1 trading plan.

The repurchase authorization has no expiration date, does not obligate Micron to acquire any common stock, and is subject to market conditions and ongoing determination of the best use of available cash. Recently, through September 2, 2021, the BOD has repurchased an aggregate of $4.04 billion of the authorised amount. (See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Equity.”)

My opinion: This is one of my main reasons why I decided to invest in Micron, because of their buyback program, they are able to generate free cash flow. With the combination of repurchased shares and increasing free cash flow year over year, the stock price of the business will undoubtedly increase. Most value investors have this point in their checklists when it comes to investing in a business. A good buyback program can drive share prices higher in the next few years. If they decide to remove the buyback program, I will re-evaluate investing in the company.

5. Conclusion

The business model is simple and easy to understand. Aside from valuation, I think Micron’s stock price has the potential to triple in the next 5 years if everything goes well. Fundamentals analysis is still the main priority in the next 2-3 years, and I will keep monitoring for declining growth signs in their business. With management purchasing shares buyback at a range of $70 to $80, only time will tell if they could reach their price target of $150 and above in the 48 to 72 months. But as of now, Micron is currently undervalued and might even hit my price target of 30% based on margin of safety.

As always, stay safe and may the markets be ever in your favour.

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Disclosure: I have a beneficial long position in the shares of MU either through stock ownership, options, or other derivatives. This article was written by me to express my personal opinions on the stock, and I receive no form of compensation for it. I also do not have a business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a trained professional. All my articles are written from my personal perspective and should not be considered as investment advice. Also, despite my endeavours to provide only accurate data, there is always a possibility that I may have included outdated or inaccurate information. Readers should exercise proper due diligence and may even consider consulting a trained professional before making an investment decision.