When there’s a clear cut trend that can be easily seen, it becomes easier to profit from it. An ongoing trend in the technology industry is the rise in the prices of NAND and DRAM (dynamic random access memory) this year. After facing a period of depressed prices last year, manufacturers decided to cut down supply and this has yielded positive results.
Back in the black
Hence, there’s nothing surprising in Micron Technology, Inc. (NASDAQ:MU)’s latest earnings report and the stock’s astronomic 123% appreciation this year, as rising NAND and DRAM prices have helped its resurgence after a torrid 2012. Micron Technology, Inc. (NASDAQ:MU)’s latest third-quarter report is indicative of the strength in prices, and management’s commentary tells us that the good times are far from over.
The solid appreciation in prices, coupled with better demand, helped Micron Technology, Inc. (NASDAQ:MU) post a profit in the third quarter. The company earned a profit of $43 million, or $0.04 per share, compared to a loss of $320 million, or $0.32 per share, in the year-ago period. While this turnaround is indeed impressive, Micron Technology, Inc. (NASDAQ:MU)’s revenue improved slightly to $2.3 billion from $2.2 billion last year. Thus, it’s evident that stronger pricing led to earnings growth and contributed to better margins.
Improvements all around
The most important thing is that this trend of strong prices is set to continue, and the rise in demand for Micron Technology, Inc. (NASDAQ:MU)’s products should help it deliver even better results. For instance, a 16% jump in the average selling prices (ASP) of DRAM along with a 6% jump in volume propelled revenue from the segment 23% higher, while an 8% increase in NAND flash prices led to a 7% jump in revenue from this segment.
Unsurprisingly, Micron Technology, Inc. (NASDAQ:MU)’s gross margin improved to 24% in the quarter from 18% in the previous one. But then, there’s surely more to come. While a slowdown in the PC industry might have hurt sales of DRAM chips, memory makers have adjusted their supply accordingly so that ASP isn’t hurt. Throw in the spike in demand for mobile DRAM, and it becomes pretty much clear that the demand is there but in another form.
Micron is benefiting from these factors, and it expects further improvement in prices going forward. The company is projecting a mid-to-high single-digits jump in DRAM prices in the ongoing quarter while costs are expected to remain flat. This indicates that further margin improvement is on the way in the fourth quarter, and this should trickle down to the bottom line.
However, NAND prices are expected to be down in the mid single-digits in the quarter, but lower bit costs than the previous quarter should help keep margins intact. The NAND business is witnessing good demand due to the booming market for solid-state drives (SSD) and mobile. Thus, a slight drop in pricing should be compensated for by higher volumes and lower costs.
As far as demand in end markets is concerned, the company seems to be finding good traction in mobile. In the DRAM business, shipments to the non-PC business now account for almost half of the total bit shipments. Micron is witnessing solid demand for mobile DRAM and NAND on the back of smartphones and tablets.
Elpida almost done
When speaking about mobile DRAM, it shouldn’t be forgotten that Micron is pretty close to acquiring bankrupt Japanese memory maker Elpida and the transaction is expected to be complete in the ongoing quarter. The reason why this is important is because Elpida was one of the suppliers to Apple Inc. (NASDAQ:AAPL) for the iPhone 5. Also, the relationship stretches back further, as Apple Inc. (NASDAQ:AAPL) had ordered Elpida chips a couple of years back as well.
Now, with the acquisition so close to being completed, Micron would probably benefit from the upcoming slate of Apple Inc. (NASDAQ:AAPL) products. The production of the next iPhone is reportedly underway and probably, a cheaper iPhone is in the works as well as Apple Inc. (NASDAQ:AAPL) looks to find a way to tap into the millions of customers in emerging markets where the current iPhone is considered too expensive.
While there’s no doubt that buying Elpida, and consequently landing a contract with Apple Inc. (NASDAQ:AAPL), will be a huge boost for Micron, a cheaper iPhone would further expand the addressable market for these companies. What’s more, the Elpida acquisition will strengthen Micron’s position in the DRAM industry and give it better pricing power than before as it would be able to command a greater portion of the supply.
Networking is another tailwind
And then there’s the networking side of Micron’s business which has been doing really well. This segment contributes around 16% of the total revenue but its growth rate is impressive. Networking DRAM bit shipments grew 19% in the previous quarter and given the positive undercurrents in the networking industry, the business should get even better.
The deployment of faster networks and data centers for the cloud have helped this side of Micron’s business turn in solid growth rates and the momentum looks set to continue. The company is looking to diversify its customer base by bringing smaller customers on board and this should further contribute to revenue.
Should you buy?
In short, everything seems to be going in favor of Micron and solid pricing along with solid demand should help it do even better in the future. But then, some might have doubts whether or not Micron is a good buy at these levels after its solid run up.
Well, I would say that it isn’t too late to buy the stock as the company’s earnings (according to Yahoo! Finance) are expected to grow at supersonic rates going forward. After a projected growth of 62% this year, analysts expect Micron to turn completely profitable next year. What’s more, even the top line is expected to post a decent jump of 18% next year.
And given the fact that the stock trades at a reasonable forward P/E of 18, I think that the valuation isn’t too stretched yet and the stock has a lot of room to run.
The article A Trend in Technology and a Simple Way to Profit From It originally appeared on Fool.com.
Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Harsh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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