MU-Buy-Light Bit growth with 20nm Ramps=Short Term, But GMs Better, NAND Soft, Tweaking Estimates, Valuations
MU reported a solid NovQ driven by strong DRAM revenues and profitability, while NAND was lighter with flat margins. MU guided to a lighter FebQ top line with soft DRAM bit growth driven by 20nm shrink challenges. NAND continues to be challenging for MU, but we believe 16nm-TLC should help. Overall DRAM-NAND supply is tight and pricing stable – a major positive. Tweaking our estimates and reiterating Buy-$42PT into 2015E. Key takeaways below.
MU reported NovQ Revenues/EPS of $4.6B/$0.97 vs. consensus of $4.6B/$0.92, GM at 35.8%, ~50bps ahead of consensus, driven by strong DRAM. MU’s FebQ outlook was weaker with 20nm shrink tightening DRAM supply. Bottom-line DRAM-NAND supply continue to be tight in 1H15-a positive. Key takeaways:
#1-DRAM Margins strong but Bit growth Outlook Impacted by 20nm Transition – Implies tight DRAM- Solid DRAM Margins and ASPs – MU noted DRAM revenues up ~8% q/q, with DRAM ASPs up with demand in Enterprise-Server and MobileDRAM demand. But looking out into the FebQ, DRAM bit growth is expected to be down 8-12% q/q as 20nm transition crimps DRAM supply. We believe this is short term and DRAM supply will pick up into the MayQ and we expect 2H15 double-digit DRAM bit growth q/q post-20nm shrink. Three Key 2015E DRAM tailwinds for MU are 1) Key Server/MobileDRAM growing ~40%/55% y/y, driving better GM, 2) 20nm DRAM and 25nm-MobileDRAM shrinks driving accretive GM, 3) DDR4-now a 30% premium to DDR3, and 4) Inotera profit-sharing negotiations are still in process.
#2-NAND is still challenging with margins and eMCP, but 16nm ramp should help close gap with peers; stable pricing and strong demand commentary positive for SNDK-MU ramping 16nm NAND driving lower cost, offset by higher cost of eMCP (up 45% q/q). MU expects TLC 16nm NAND by April/May 2015.
2015-”All about DRAM-NAND Margin” – Improving Server-MobileDRAM Mix and any Potential NAND Improvement positive for GM-We believe the 20nm DRAM should be a positive tailwind especially as with low inventories, tighter DRAM supply with 20nm, and stable demand in NAND with 16nm-TLC by mid 2015, MU should potentially have some GM tailwinds.
Valuations at ~8x P/E- We are tweaking our 2Q15E (FebQ) from prior $4.9B/$1.00 to $4.27B/$0.85 our F15E from $20.4B/$4.21 to $18.7B/$3.97, and our F16E from $23.4B/$4.90 to $22.1B/$4.93. Reiterating Buy-$42PT, ~8.5x our F16E EPS of $4.93. MU trades at ~7.8x F16E EPS, a substantial discount to Semis and the peer group, with improving margins and cash flow. Note MU also has a significant ~$1B buyback not included in our estimates.
Guide-DRAM/NAND bits and ASPs – For the NovQ DRAM bit growth was up 8% and ASPs were up 1% while NAND bit growth was up 20% and ASPs were down 6%. MU guided FebQ DRAM bit growth at “down high single to low double digits” and ASPs at “flat to down low single digits,” while it guided NAND bit growth at “flat to down low single digits” and ASPs at “flat to down low single digits.” MU guided FebQ top line to $4.1B-$4.3B.
Valuations: MU continues to trade at a discount relative to the peer group (see table below).
$1B in Share Repurchases and the CFO Search – MU noted that it continues to engage in buybacks from the recent billion dollar authorization as well as convert reduction. While current CFO Ron Foster will be there until February 28, 2015, we believe the overall CFO search process is going well with a good list.
Content and Market Perspective – MU has noted it is seeing the trend from 400-450MB in 2013, to 700MB in 2014, to 1-1.4GB in 2015, and noted that we will see multiple 3GB and 4GB phones in 2015. The company also mentioned it is seeing similar phenomena on tablets with content increasing from 2GB to 3-4GB on the next gen offerings, all of which are a positive for supply/demand dynamics. DRAM industry bit growth is at low to mid 20s and NAND industry bit growth at high 30s to low 40s.
Other names mentioned in this report:
Inotera (3474-TW, NT$49.60, Not Rated)
Sandisk (SNDK, $95.13, Buy, PT$125)
Micron Technology Inc.8000 S. Federal Way
Boise, ID, 83707