Micron Technology, Inc. (NASDAQ:IN) is an American producer of computer memory and computer data storage, including dynamic random access memory, flash memory and USB drives. Its headquarters is in Boise, Idaho. The stock is up nearly 70% in 2023 as revenues have increased. decreased by almost 40% over the same time. What’s amazing is that the stock has almost tripled in the last 5 years without any revenue growth. The chart below shows the company’s revenue over the past few years.
The company faces several near-term challenges, such as loss of market share, and I also explain that management’s expectations for less volume growth might be a little too optimistic. I expect these headwinds to play a significant role in slowing the company’s growth. outlook for the coming year. DCF Valuation puts these catalysts into numbers, and we discover how overvalued the company is despite my optimistic projections compared to Wall Street analysts. This shows how the market undervalues headwinds and overvalues tailwinds, thanks to soft financial conditions and the AI-led frenzy in semiconductor stocks, which propelled the stock to grow 70%. with a halving of revenue in fiscal 2023.
Low growth expectations in 2024 may still be too optimistic
From the company management advice looks very optimistic for the coming year. This is largely based on the belief that oversupply will diminish and the balance between supply and demand will be restored, leading to higher chip prices. He does not consider the possibility of slowing down the growth of demand for final goods, which use their products as inputs. For the coming calendar year, the company waits mid-single-digit growth in its Data Center segment, and low/mid-single-digit growth in the PC segment, modest growth in the mobile segment. The company also expects its gross margin to increase in the near term due to higher prices rather than increased shipments.
However, I think management’s analysis could be incorrect and probably is incorrect. First, in the dynamic random access memory (DRAM) segment, prices slide because there is a glut of DDR4 chips putting downward pressure on prices. There is an oversupply and an influx of used chips, leading to a supply glut.
The company is also facing problems in China, due to strained trade relations between the United States and China. THE The US government banned Micron to sell its memory chips to Chinese tech giant Huawei in 2020 as the trade war intensified. China retaliated earlier this year by banning its major infrastructure suppliers from buying Micron’s chips. This will have a major impact on the company’s growth prospects, as the company acknowledged in its Annual report 2023. Unfortunately, it is difficult to give an exact figure since there is no list of companies designated as critical information infrastructure operators, published by the Chinese government or otherwise available to the company. Therefore, the full impact of the ACC’s decision on Micron’s business remains unclear. To top it all off, the U.S. Commerce Department is mulling new restrictions that could prevent domestic chipmakers like Micron from receiving subsidies if they expand their overseas operations to China, Russia, Iran or Korea North. These rules have not yet been approved, but they could impact Micron’s overseas foundries (including one in China) and make it much more difficult for Micron to overcome its cyclical challenges and stabilize its business.
The personal computer (PC) and smartphone industries are a major market for the company’s DRAM products. DRAM accounted for 71% of the company’s revenue in fiscal 2023. Based on the guidance of major players in the PC and smartphone industries, the growth outlook appears bleak. Dell mentioned that large companies are cautious in their spending and have yet to see a broader recovery in the PC segment. “We have seen greater caution from our customers. We’ve seen them be more selective, particularly large commercial customers, enterprise customers and particularly in North America. This is what the COO of Dell had to say. Even Hewlett Packard (HPE) warned of weak demand and indicated that they expect the macro environment to remain challenging over the next two quarters.
Declining market share in the semiconductor industry
Micron failed to gain substantial market share from the AI wave that led to higher demand for data centers and related products in late 2022 and throughout 2023. Demand of the company almost halved in the last financial year, compared to the previous financial year. At the same time, its competitors in the semiconductor sector have gained market share.
The chart below, from Statista, shows Micron’s share of the semiconductor industry over the years. Although data for 2023 is not available, it seems clear that the company has lost market share as its revenues have almost halved, while others, like Analog Devices, Microchip Technology and Infineon Technologies, have increased their income.
Even in the dynamic random access memory (DRAM) segment which accounts for 71% of its revenue, it lost market share in the second quarter of 2023 on a sequential basis, with its share falling from 26.9% in first quarter 2023 to 25.8% in the second quarter 2023.
Source: Statista- Global market share of DRAM chip suppliers
THE Analyst Consensus Estimates as Micron’s revenue is expected to grow approximately 48% in FY2024, then another 38% in FY25, and 8% beyond that. I disagree with this consensus because I believe the headwinds (both macroeconomic and business-specific) that I mentioned in the catalysts section will become more pronounced towards the second half of the next fiscal year . That’s why I assumed 11.5% growth in FY24, but for the next two years I assumed 45% compound growth due to the PC refresh cycle (as mentioned by Dell during its earnings call) which should see the introduction of AI PCs and I think Micron should benefit from this. Beyond that. I assumed a revenue CAGR of 10% for FY2027 and FY2028.
Profit margins – from gross profit level to net income margins, are expected to gradually improve and reach the long-term average observed between fiscal 2018 and fiscal 2022, assuming costs increase at their long-term average rate of increase.
Operating cash flow was estimated over the long term using the long-term average conversion ratio of operating income to operating cash flow. Capital expenditures for 2024 were taken using the management advice. Capital spending is expected to grow 5% over the next two years (through FY26) before returning to average operating cash flow dedicated to capital spending. This is how the free cash flow was estimated and then discounted using the CAPM model.
Based on these estimates, I received a fair value estimate for Micron Technology of $66.24 billion, or the equivalent of $60.00 per Micron Technology share. This represents a drop of almost 30% from the closing price on December 27, 2023.
NAND Manufacturing – Gaining Market Share
While Micron lost market share among all semiconductor companies and in the DRAM chip sector, it gained market share in the DRAM chip sector. NAND manufacturing sector. The company’s share increased from 10.9% in the first quarter of 2023 to 13% in the second quarter of 2023. If this trend continues, the company’s growth will be much higher than this which I estimated in my DCF valuation model. In addition
However, I don’t see this as a big risk since the market share gain is a consequence of a decrease in overall market size. Micron’s NAND revenues were $886 million from January to March 2023, with a total market share of 10.9%, a market size of $8.128 billion. Between April and June 2023, the company’s NAND revenue was nearly 1 billion dollars with a market share of 13%, a total market size of $7.692 billion. So while it’s good news that the company is gaining market share, it’s not a good sign that market share has declined.
The chart below shows the market share in the NAND manufacturing sector over the years.
NAND Prices reached a low point in mid-2023 and is expected to have increased by the fourth quarter of 2023. This can largely be attributed to production and supply controls implemented by suppliers as a measure to address the oversupply problem on the stairs. It’s too early to predict price changes through 2024, but sustained action by Samsung and other manufacturers (limiting production and supply) and a recovery in enterprise SSD sales could push them higher .
However, without robust demand, the momentum of this price surge could run out of steam in the coming year, impacting the industry and consumers. Samsung expects the smartphone market to grow, but this is highly dependent on increased anticipation/expectation of a soft landing. I don’t expect a soft landing based on several factors, which is why I don’t view the growth of the NAND segment as a significant risk.
Based on all the catalysts – loss of market share and reality check to company management’s overly optimistic expectations, which outweigh the risks associated with my sales thesis – growth of the NAND markets, I would like to make a sell recommendation on Micron technology. action. Based on my valuation model, the fair value of Micron Technology stock is $60, representing a decline of almost 30% from the December 27, 2023 closing prices.