Micron Technology Inc. (NGS: MU) fell 3% in a down market on 9/30/20. The company’s fiscal 4Q20 results exceeded consensus expectations, but the outlook disappointed as enterprises have been slow to resume normal operations. Guidance was consistent with ongoing progress in markets including smartphones and automotive, joining continuing strength in data center and compute. In NAND, Micron posted record SSD revenue in the quarter, with strong momentum in 128-layer RG drives. Micron’s high-value solutions comprised over 80% of NAND bits as of fiscal 4Q20, achieving internal goals ahead of schedule.
The DRAM 1z production mix was a significant contributor to 4Q20 sales. We believe that prospects for moderate to lower bit supply growth (new capacity) amid strengthening demand will help keep a floor under NAND and DRAM pricing. On a cyclical basis, the characteristics of the current environment – telecommuting, social networking, video streaming and online gaming – are generating higher levels of data traffic. Micron has been reallocating production and shifting supply from traditionally strong markets (smartphone and automotive) to data center and compute for both DRAM and NAND SSDs.
Demand is improving for those traditional markets, as automotive plants reopen and 5G drives phone demand, while remaining strong in data center and compute. Micron’s memory products have become increasingly vital in optimizing, managing and maintaining the flow of data, both in normal and in uncertain times. The ongoing secular shift toward cloud data center, along with continued demand for traditional connected devices (PCs, smartphones, etc.), should fuel long-term growth in the memory market.
RECENT DEVELOPMENTS
MU shares rose 88% in 2017, compared to a 35% gain for Argus-covered semiconductor peers. MU was up 55% in 2016, compared with a 41% gain for a subset of Argus-covered memory companies, nearly all of which (excluding NTAP) were subsequently acquired. Sales topped the $5.97 billion consensus forecast. CEO Sanjay Mehrotra attributed the double-digit growth in fiscal 4Q20 sales and adjusted profits to strong demand for DRAM for cloud, PC, and gaming consoles, along with an ‘extraordinary’ increase in QCL NAND shipments.
After being impacted at its worldwide sites in the early months of the pandemic, most of Micron’s fab and assembly sites operated at full production throughout fiscal 3Q20. By the fourth quarter of the August fiscal year, nearly 75% of Micron personnel were back at work. The pandemic has impacted cyclical recovery in DRAM and NAND, causing stronger demand in some niches and weaker demand in others. Demand in consumer-driven segments, including automotive, smartphones and PCs, was meaningfully lower than pre-COVID-19 demand in the spring, but is now showing signs of recovery. Within the PC space, demand for enterprise notebooks and Chromebooks remains healthy.
Simultaneously, the pandemic is driving changes in consumer, corporate, and government behavior worldwide. The consumer shift to work & learn at home, online gaming, and video streaming are driving additional data center capacity requirements. Governments are providing Chromebooks and tablets to facilitate online learning. Amid near-term headwinds and demand shifts, Micron continues to execute on its technology roadmap. In DRAM, Micron is ramping to volume its advanced 1z technology, which was a significant contributor to 4Q20 sales. Together, 1z and 1y nodes make up well more than 50% of DRAM production. In anticipation of improving DRAM demand, Micron is increasing cleanroom production in Taiwan, with new output scheduled for FY21. In NAND, Micron entered volume production for its 128-layer RG (replacement gate) NAND technology in 3Q20 and began shipping RG-based consumer SSDs during 4Q20.
The company is making progress on its second-generation RG node. Micron anticipates that RG NAND will represents a meaningful proportion of NAND output by the close of calendar 2020. Micron will introduce products based on its second-generation RG technology in FY21. Additionally, QLC bits more than doubled sequentially and represented more than 20% of overall NAND production, up from 10% in 3Q20. In terms of technology development by end market, Micron continues to develop its SSD portfolio. In 4Q20, the company expanded its NVMe portfolio while continuing SATA leadership.
Total SSD revenue nearly doubled from the prior year, led by data center demand. In the client (PC) space, capacity per SSD increased 30% sequentially. In the data center & networking market, demand is strong for Micron’s 1z DRAM. The company believes that 5G handsets units could reach half a billion during calendar 2021. In consumer markets including PC, automotive and graphics, the work & learn from home trend is driving strong notebook PC demand. Desktop PC demand, by contrast, is languishing as offices sit idle or stay lightly staffed. In graphics, Micron’s GDDR6 shipments are supporting next-generation gaming consoles. The company also saw a strong recovery in automotive demand into fiscal year-end, with additional sequential momentum forecast for fiscal 1Q21. In terms of sales into end markets, Computing & Networking revenue (50% of total) was up 59% annually and 36% sequentially. Overall demand was strong across DRAM, NAND, and 3D XPoint.
Micron was supply-constrained for certain DRAM compute products, which limited its ability to meet demand. Mobile revenue (24% of total) was up 4% annually and down 4% sequentially, as strong sales into the smartphone market in 4Q20 receded after strength in 3Q20. The outlook for calendar 2021 is promising, with 5G expected to drive a major multiyear upgrade cycle. Compared with 4G, 5G phones have significantly higher DRAM and NAND content per device.
Storage revenue (15% of total revenue) was up 8% annually and down 12% sequentially, as strong data center demand was offset by weakening trends in enterprise. Micron had record SSD revenue in fiscal 4Q20, led by cloud data center demand. By technology, NAND sales (25% of revenue) were up 26% annually though down 9% sequentially. DRAM revenue (72% of total) was up 26% annually and 22% sequentially. DRAM posted a second quarter of annual growth in 4Q20 after posting 3Q20 revenue that represented its first positive annual comp since fiscal 1Q19. Both DRAM DRAM demand growth is forecast in the 20% range, while ‘disciplined’ industry capex should help prices and market conditions in 2H21.
For NAND, industry bit demand growth for 2020 will likely be in the mid-20% range. Bit demand growth is forecast to improve to the 30% range in 2021, but there is some risk of pricing pressure if industry expansion plans remain on track. For both NAND and DRAM, Micron’s long-term bit supply growth is in line with industry trends. The near-term outlook for Micron balances positives with some negatives. On the upside, Micron is seeing recovery in automotive, smartphone, and consumer; and cloud and laptop demand is healthy and growing. On the downside, enterprise has weakened further as the return to offices is extremely slow; the industry is also facing some inventory overhang. Additionally, Micron stopped all shipments to Huawei on 9/14/20, and will not offset that lost volume until mid-FY21. Micron’s fiscal 1Q21 guidance slightly lagged consensus but was nonetheless consistent with solid year-over-year growth in sales and profits. The ongoing secular shift toward cloud data center, along with continued demand for traditional connected devices (PCs, smartphones, etc.), should fuel long-term growth in the memory market.
EARNINGS & GROWTH ANALYSIS
Revenue was above the midpoint of management’s $5.75-$6.25 billion guidance range. Sales also topped the $5.97 billion consensus forecast. Non-GAAP earnings came to $1.08 per diluted share, up 92% from $0.56 a year earlier. For all of FY20, Micron generated revenue of $21.4 billion.
Non-GAAP earnings totaled $2.84 per diluted share, down 55% from $6.29. For fiscal 1Q21, which is a seasonally slow quarter after the OEM build period, mainly across the calendar third quarter, Micron forecast revenue of $5.0-$5.4 billion. We expect volatility in MU earnings and in Street estimates to remain intense.
FINANCIAL STRENGTH & DIVIDEND
During fiscal 3Q20, Micron issued $1.25 billion of investment-grade notes. Along with $1.25 billion of cash on hand, Micron used $2.5 billion to repay the $2.5 billion it drew from its revolving credit facility at the beginning of 3Q20. Micron slowed its share repurchase program in response to the pandemic, spending $176 million on buybacks in FY20.
Micron returned $2.7 billion to shareholders in FY19, while reducing shares outstanding by 7%, reflecting both buybacks and convertible note redemptions. Micron’s capital spending for FY20 was $7.9 billion, down from approximately $9 billion in FY19. The company forecast FY21 capital spending of $9 billion, focused on 1-alpha DRAM and second-generation RG NAND.
VALUATION
MU shares trade at 11.1-times. MU trades at 50% of the market multiple, below its historical five-year average of 73%.
