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Micron: There Is More Upside Potential Than Downside Risk

Summary

This article is a response to a recent bearish article on Micron. I felt it was necessary to offer a comprehensive response to each of the points raised against Micron.

Response #1: The decline in DRAM prices are already reflected in Micron's stock price. Plus, Micron's 20nm nodes will enable it to keep cost-low, become more competitive and expand market share.

Response #2:For a viable business with a strong balance sheet, trading at undemanding valuations, Tangible Book Value can imply limited downside. Plus, Bank of America is a bad comparable company.

Response #3:Micron's current ratio and its $5.1 billion in cash and marketable investments, imply that it can cover its debt obligations without any default risk.

Introduction

This article is a response to a bearish article on Micron Technology, Inc. (NASDAQ:MU) entitled," Micron: The $10 Floor Cannot Hold For Long." The article's summary is as follows:

  • Micron will likely breach the $10 floor in the coming couple of months.
  • There are no indications of an immediate reversal in declining DRAM prices.
  • The stock is trading below its Tangible Book Value, but it can fall more.

This article is going to focus on looking at the other side of the arguments raised in the aforementioned article. Provide insights as to why the bears have it wrong on Micron. Most importantly, the article aims to offer a compelling argument as to why shorting Micron is not a good idea.

Introduction

  • Response #1: It is true that "there are no indications of an immediate reversal in declining DRAM prices." But it is not true to imply that Micron's revenues will continue to deteriorate as DRAM prices decline.

One of the points raised in the article that I concur with is that Dynamic Random-Access Memory ("DRAM') average selling prices have been falling. This has been one of Micron's main challenges. As a result, DRAM's gross margin was ~20% lower in Q4 2016 y/y.

But the decline in DRAM's average selling prices is not new. This is why in Q2 2015, Micron decided to reduce PC DRAM sales. It was not cost effective for Micron to mass produce DRAM's on 25nm nodes and above while demand reduced and prices declined.

"Our sales guidance anticipates taking strategic action to reduce PC DRAM sales this quarter given the recent demand and price weakness." - Mark Heil, Micron Technology's earnings call transcrip, Q2 2015.

Because DRAM sales constituted more than 50% of Micron's total sales, the stock price has declined by ~60% since Q2 2015 to reflect the anticipated decline in DRAM prices and Micron's decision to reduce PC DRAM sales.

This is why I believe that the decline in DRAM prices are already reflected in Micron's stock price.

But that is not all. Micron has been ramping up DRAM production on its 20-nanometer node. Giving it a competitive cost position and a catalyst to boost DRAM output. This will help Micron mitigate losses emanating from falling DRAM average selling prices.

"Internally and from our operations perspective, Micron remains focused on a few key...


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