I thought I would take a closer look at Micron today. Ant has brought it up a couple of times, and Putnid and others have chimed in.
This is a great thread from a couple months ago: http://discussion.fool.com/micron-mu-er-coming-watch-the-story-3…
One of Putnid’s contributions to the thread was especially helpful to me: http://discussion.fool.com/can-you-say-a-little-about-their-comp…
Especially this part: NAND and DRAM chips are commodity products. They’re in high demand because they’re used in all manner of electronic applications. When demand outstrips supply, chip prices skyrocket. Eventually, one of these companies builds another plant (even though it’s a huge investment).
It’s amazing to see how this plays out. Micron describes themselves in 4 segments on slides 11-14 of their recent investor deck: https://seekingalpha.com/article/4109704-micron-technology-i…
For brevity’s sake, I’ll call them:
DRAM was the biggest by far, accounting for almost 50% of revenue in the quarter. It’s really incredible to see the numbers. Short version:
In Sep16Q they sold $1.25B worth of DRAM for a profit of $11M.
In Sep17Q they sold 2.85B for a profit of 1.6B.
So they went from a 0.9% profit to to 56%.
I have seen no clearer example of how commodity products work. That was just their largest (DRAM) segment, to be clear…but the overall company gross margin went from 18% to 51%. It’s truly all about demand.
Another way to look at it:
Sep16Q rev: 3.2B
Sep17Q rev: 6.1B
Sep16Q exp (incl COGS): 3.2B
Sep17Q exp (incl COGS): 3.7B
So basically, they need the demand or else they’re just covering costs. But when demand goes up almost all of it drops to the bottom line.
Short answer: I don’t know.
Are higher prices here to stay? Putnid’s point above makes me think probably not. But then, that’s why Micron is sporting a PE of 10.
It does look like, by all estimates I’ve seen, demand will continue into next year. Does that make Micron a short term buy? How much will it drop if another player announces plans to “build another plant?” And how likely is it they will?
I’ve heard a lot of predictions, but I’m afraid we will all have to decide for ourselves what’s likely to happen.