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Micron Technology (NASDAQ:MU) Reports Q4 In Line With Expectations But Quarterly Guidance Underwhelms


Full Report / November 02, 2021
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Memory chips maker Micron (NYSE:MU) reported results in line with analyst expectations in Q4 FY2021 quarter, with revenue up 36.6% year on year to $8.27 billion. On the other hand, guidance for the next quarter missed analyst expectations with revenues guided to $7.65 billion, or 9.84% below analyst estimates. Micron Technology made a GAAP profit of $2.72 billion, improving on its profit of $990 million, in the same quarter last year.

Micron Technology (MU) Q4 FY2021 Highlights:

  • Revenue: $8.27 billion vs analyst estimates of $8.21 billion (small beat)
  • EPS (non-GAAP): $2.42 vs analyst estimates of $2.34 (3.35% beat)
  • Revenue guidance for Q1 2022 is $7.65 billion at the midpoint, below analyst estimates of $8.48 billion
  • Free cash flow of $1.87 billion, up 23.6% from previous quarter
  • Inventory Days Outstanding: 95, down from 96 previous quarter
  • Gross Margin (GAAP): 47.8%, up from 34.1% same quarter last year

Founded in the basement of a Boise, Idaho dental office in 1978, Micron (NYSE:MU) is a leading provider of memory chips used in thousands of devices across mobile, data centers, industrial, consumer, and automotive markets.

Micron is one of the leading producers of both DRAM and NAND memory chips globally, though DRAM has consistently accounted for the majority of Micron’s revenues. Micron’s DRAM is mostly used in PCs, servers, networking gear, along with industrial and automotive verticals. NAND is used in the same end markets, along with a heavy weighting in consumer devices like smartphones and tablets.

Memory has the most volatile pricing dynamics in the semiconductors industry, which can result in Micron’s earnings results fluctuating wildly. As a result Micron’s valuation will often appear abnormally low compared to other semiconductors during the peak of the memory cycle, with the stock often trading for low to mid single digit forward earnings multiples (4x-8x) before dramatically expanding to high teens to mid twenties (18x-24x) when the cycle turns down.

Micron’s peers and competitors include Western Digital (NASDAQ:WDC), Seagate (NASDAQ:STX), SK Hynix (KOSI:000660), and Samsung (KOSI:005930).

Memory Semiconductors

The global memory chip market has become concentrated due to the highly commoditized nature of these semiconductors. Despite the market consolidation, DRAM and NAND are subject to wide pricing swings as supply and demand ebbs and flows. This plays itself out in the business models of memory producers, where the large, fixed cost bases required to produce memory chips in volume can become very profitable during times of rising prices due to high demand and tight supply but also can result in periods of low profitability when more supply is brought online or demand drops. Read More There are two main types of memory chips: dynamic random access memory (DRAM) and Flash memory (NAND). In any electronic device where a processor or a graphics chip is conducting a task using data, it needs to read the data from where it is stored, known as memory. Smartphones, PCs, and data centers account for more than two thirds of memory demand. DRAM is “volatile” memory, it is a semiconductor that requires an electric charge to retain data – it is the type of memory commonly used in PCs. The advantages of DRAM are the speed at which a CPU/GPU can access the data and its long useful life. Unfortunately, “volatile” means it only can hold data temporarily when it is powered. By comparison, flash memory or NAND is “non-volatile” memory, which means that it saves data when power is removed, making it commonly used in almost every mobile device, along with USB flash drives. Its smaller form factor and greater storage capacity has made NAND-powered solid state drives (SSDs) the long term replacement for the original computing storage device, the hard disk drive.

Sales Growth

Micron Technology's revenue growth over the last three years has been slow, averaging 1.27% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $6.05 billion to $8.27 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Micron Technology Total Revenue

This was a strong quarter for Micron Technology as revenues grew 36.6%, topping analyst estimates by 0.74%. This marks 6 straight quarters of revenue growth, implying we are mid-cycle for Micron Technology, as a typical upcycle tends to last 8-10 quarters.

Micron Technology believes the growth is set to continue, and is guiding for revenue to grow 26.3% YoY next quarter, and Wall St analysts are estimating growth 31% over the next twelve months.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

Micron Technology Inventory Days Outstanding

This quarter, Micron Technology’s inventory days came in at 95, 15 days below the five year average, showing no indication of an excessive inventory buildup at the moment.

Pricing Power

Micron Technology's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 47.8% in Q4, up 13.7 percentage points year on year.

Micron Technology Gross Margin (GAAP)

Micron Technology' gross margins have been trending up over the past year, averaging 36.6%. This is a welcome development, as Micron Technology's margins are slightly below the group average, potentially pointing to improved demand and pricing.

Profitability

Micron Technology reported an operating margin of 37.1% in Q4, up 15.6 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.

Micron Technology Adjusted Operating Margin

Operating margins have been trending up over the last year, averaging 26.1%. Micron Technology's margins remain towards the high end of semiconductor companies, driven by its efficient operating model's economies of scale.

Earnings, Cash & Competitive Moat

Analysts covering the company are expecting earnings per share to grow 110% over the next twelve months.

Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Micron Technology's free cash flow came in at $1.87 billion in Q4, up 1.59 thousand% year on year.

Micron Technology Free Cash Flow

Micron Technology produced free cash flow of $2.75 billion in the last year, which is 7.94% of revenue. It's good to see positive free cash flow, since that allows it to strengthen its balance street, but we wouldn't want to see its free cash flow yield drop much lower.

Micron Technology’s average return on invested capital (ROIC) over the last 5 years of 27% implies it has a strong competitive position and is able to invest in profitable growth over the long term.

Key Takeaways from Micron Technology's Q4 Results

Sporting a market capitalization of $79 billion, more than $8.63 billion in cash and with positive free cash flow over the last twelve months, we're confident that Micron Technology has the resources it needs to pursue a high growth business strategy.

We were very impressed by the strong improvements in Micron Technology’s gross margin this quarter. And we were also glad to see the improvement in operating margin. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, we think this was still a really good quarter, that should leave shareholders feeling very positive. The company currently trades at $70.61 per share.

Is Now The Time?

When considering Micron Technology, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Micron Technology is a solid business. Its revenue growth has been very weak, but at least that growth rate is expected to increase in the short term. But on a positive note, while its cash burn raises the question of whether it can sustainably maintain its growth, the good news is its high return on invested capital suggests it is well run and in a strong position for profit growth, and its strong operating margins are indicative of a well run business.

Micron Technology's price to earnings ratio based on the next twelve months is 6.6x. There are definitely things to like about Micron Technology and looking at the semiconductors landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $108.5 per share right before these results, implying that they saw upside in buying Micron Technology even in the short term.

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