Micron the catalyst of the year – micron technology inc. (nasdaq mu) seeking alpha o gosh


This may disappoint some but it’s still too early to initiate a dividend or a buyback program. I expect these items to move up the list starting in calendar 2019. The reason is due to financial flexibility and conservative money management. There’s no reason to commit or think about cash allocation to something until the company has a cash cushion in which to work off of. Sure, a small dividend isn’t impossible to initiate with just cash flow alone – as a 14 cent per quarter dividend (a 1% yield at $54 per share) would cost $700M a year versus a trailing 12-month cash flow of $6.7B. But, over the last year, the company has been allocating 50% of its FCF toward deleveraging leaving the company with $3.35B for other investments.

The bottom line is the market expects a cash neutral-to-cash positive position which opens up the possibilities of various free cash flow allocations. However, I expect management to take a conservative approach to this event and therefore, see the market reaction as neutral to slightly bearish. This leaves the door open for a surprise in the positive direction, however. Record Earnings

With several factors coming together in the last year including a strong DRAM and NAND market, acquisitions from the last several years producing fruit, and the company catching up in terms of technology transitions, Micron has been able to produce revenue, free cash flow, and earnings better than any time in its history.

If the DRAM and NAND market drops out due to some unforeseen cut in demand, the Micron of 2018 is still the strongest the company has ever been. With technology node transitions exceedingly closer to competitors than in the past as well as strong cash flow furthering this, Micron has been able to make itself a leader in the market. If a downturn were to happen, it won’t put the company behind, struggling to make ends meet – contrary to previous episodes of memory market slumps.

Now, on Monday, what will we know better? Two things: an insight into how the current quarter is going and a landscape of the market for the rest of the year (which I’ll get into next). The market has small expectations for a pre-announcement of earnings – Wednesday the stock began readying itself for something as the stock has taken off, now above $56 (and validates my thesis this analyst event will be a large catalyst).

However, I don’t see a pre-announcement coming as the company has done it only once in each of the last two fiscal years and both were in the February quarter – as in, it just did it last quarter. Overuse of this will lessen the stock response and it’s clear Micron doesn’t plan on doing more than one per fiscal year. But, I do expect some kind of comment on how the current quarter has shaped up.

The bottom line is the market wants to know about future quarters and the memory market environment outlook. This quarter is a critical time as many estimates set last year predicted the market declining and heading for the bear cycle by now. This quarter’s results will likely fall in line to prior quarters but this leads to the next topic. DRAM And NAND Market Dynamics

If you follow Micron in the least you know the memory market is what drives the sentiment of the stock. So while we’d like to say, "Oh the memory market is fine! It doesn’t have that much of an impact and the market should not move with every analyst prediction," it just isn’t the case.

The good news is the DRAM market has not collapsed like a good few analysts predicted at the close of 2017. In fact, the DRAM market has stabilized in the last two-to-three months. Now, this is spot pricing; contract pricing has not moved down at all, even after the decline which started in October of last year. And because Electric Phred is the master of price scraping and chart construction, I will refer you to his chart below as well as his article for more insight on this specifically.

Keep in mind, this softening isn’t out of the seasonally ordinary. Last year, spot pricing softened around the same time and then took off again. I expect management to continue to talk about a stable pricing environment for DRAM but this affirmation will likely get pushed aside by the market and not affect the stock much.

It seems the market doesn’t take management’s narrative seriously on this front and any pop we’ve seen on this topic gets sold off by the analyst who has less information than the head of the company itself as he/she gives their own two cents. I’m not defending this reaction but this is just how it’s gone.

Now as for NAND, there’s some fun going on here. Pricing has declined but it appears CEO Sanjay Mehrotra has been accurate in his "NAND is elastic" prediction. Remember Micron saw a huge increase in its SSD sales – to the tune of 80% year-over-year. As the company ramps into its 96-layer NAND technology, the cost per bit will continue to come down but the demand will remain. This makes pricing less of thorn in the side than it would be otherwise.

NAND is clearly opening up a new chapter in its life now that these fast drives are becoming more cost effective given the speed and advantages they afford. Gone are the days where database and PC builders couldn’t effectively utilize SSDs due to small size and cost. This year is a pivotal year for NAND as there is a large market ready to convert from spinning disks to solid-state Ferraris.

The bottom line is management should talk about the memory environment considering we’re two quarters into 2018 and reinforce the situation we all are seeing in pricing: analysts are wrong as the market has remained resilient in demand and pricing. The market’s reaction could initially be bullish but it’s going to take more than just this topic to keep it rallying.

Finally, the most exciting topic about this event – 3D XPoint. It has been a patient wait for some real information from management about this product. It was December of last year which reignited the interest for investors about 3D XPoint when management gave away this tidbit:

And here we are at the analyst event. Now, this could have meant any of the investor events back in January or February but not much if anything was said on the topic, therefore, I place the focus squarely on Monday’s event concerning this product line. I’m looking for updates on sampling and ramping to enterprise customers and what its roadmap is for getting production in full swing.

Expectations have been set by management for as early as 2018 and more realistically 2019 for 3D XPoint to take flight. The bottom line is management needs to talk about this in much greater detail than it has to this point. The market should be expecting something, though the quiet nature of analysts on this front is baffling so it’s possible the market has no or low expectations set for this.

The problem which needs to be cleared up by management is what is the impact of XPoint to Micron in terms of revenue and market appetite. If none of this is discussed I will be disappointed as this product would fall to the much-ado about nothing category. But, seeing what the Stephen Breezy’s of the world are saying about how this could be revolutionary gives me hope this is not a dead end and is likely a close to the vest secret. And Now We Wait

I anxiously await what comes from this analyst event and will be keeping score based on the agenda items I outlined above. The idea is to use the market’s expectations in contrast to management’s comments. Given what I expect and how I see the market positioned, there are certain items which may give way to a loud response in terms of share movement – while keeping an eye on volume. I look forward to deconstructing the event next week.