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Micron Technology (NASDAQ:MU) Surprises With Strong Q2, Provides Optimistic Guidance For Next Quarter


Full Report / March 29, 2022
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Memory chips maker Micron (NYSE:MU) announced better-than-expected results in the Q2 FY2022 quarter, with revenue up 24.8% year on year to $7.78 billion. On top of that, guidance for next quarter's revenue was surprisingly good, being $8.7 billion at the midpoint, 6.57% above what analysts were expecting. Micron Technology made a GAAP profit of $2.26 billion, improving on its profit of $603 million, in the same quarter last year.

Micron Technology (MU) Q2 FY2022 Highlights:

  • Revenue: $7.78 billion vs analyst estimates of $7.54 billion (3.24% beat)
  • EPS (non-GAAP): $2.14 vs analyst estimates of $1.98 (8.26% beat)
  • Revenue guidance for Q3 2022 is $8.7 billion at the midpoint, above analyst estimates of $8.16 billion
  • Free cash flow of $1.02 billion, up 53.2% from previous quarter
  • Inventory Days Outstanding: 119, up from 107 previous quarter
  • Gross Margin (GAAP): 47.2%, up from 26.4% 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 unimpressive, averaging 6.46% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $6.23 billion to $7.78 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 decent quarter for Micron Technology as revenues grew 24.8%, topping analyst estimates by 3.24%. This marks 8 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.

However, Micron Technology believes the growth is set to continue, and is guiding for revenue to grow 17.2% YoY next quarter, and Wall St analysts are estimating growth 19.7% 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 119, 7 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

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 47.2% in Q2, up 20.8 percentage points year on year.

Micron Technology Gross Margin (GAAP)

Micron Technology' gross margins have been trending up over the last year, averaging 45.8%. This is around the average of what we typically see in semiconductor businesses, but the rising margin may be indicative of improving cost controls.

Profitability

Micron Technology reported an operating margin of 35.3% in Q2, up 15.2 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 34.9%. Micron Technology's margins remain one of the highest in the semiconductor industry, driven by its highly efficient operating model's economies of scale.

Earnings, Cash & Competitive Moat

Analysts covering the company are expecting earnings per share to grow 31% over the next twelve months, although estimates are likely to change post earnings.

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 $1.02 billion in Q2, up 490% year on year.

Micron Technology Free Cash Flow

Micron Technology has generated $5.09 billion in free cash flow over the last twelve months. This is a solid result, which translates to 16.3% of revenue. That's above average for semiconductor companies, and should put Micron Technology in a relatively strong position to invest in future growth.

Micron Technology’s average return on invested capital (ROIC) over the last 5 years of 28.3% 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 Q2 Results

Sporting a market capitalization of $89.4 billion, more than $10.1 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 excited to see that earnings outperformed Wall St’s expectations. On the other hand, it was less good to see the inventory levels increase. Zooming out, we think this impressive quarter should have shareholders feeling very positive. The company is up 2.76% on the results and currently trades at $84.45 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. However, its revenue growth has been very slower, and analysts expect growth rates to deteriorate from there. But on a positive note, its impressive operating margins are indicative of an highly efficient business model, and its high return on invested capital suggests it is well run and in a strong position for profit growth.

Micron Technology's price to earnings ratio based on the next twelve months is 7.3x. 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 $112.5 per share right before these results, implying that they saw upside in buying Micron Technology even in the short term.

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