The Catbird Seat Could Heat Up
DRAM makes up over 70% of Micron’s revenue. Its increased asp and bit growth across products has led to the company’s out-sized top line growth. Can the DRAM market hold up? Which industry players will increase capacity that could potentially drive down asp? Micron may have partially answered that question on the earnings call.
Micron wants to diversity its portfolio of LPDRAM, MCP and managed storage solutions to meet customer demands. The company also wants to expand its 64-layer 3D TLC NAND capabilities and its portfolio of low-power solutions with 1X LPDRAM and 1X nanometer DRAM designs. Micron needs additional capacity to meet the demands needed by growth in the cloud, artificial intelligence, and increased memory needs in the mobile space. It announced plans to build a $7.5 billion clean room space:
Accordingly, we are executing plans to add clean room space in our NAND and DRAM SAS network. With the support of the Singapore Economic Development Board, we have finalized plans to build additional shelf space in Singapore, adjacent to our existing NAND Center of Excellence. The primary purpose for this new clean room space will be to transition our existing wafer capacity to future 3D NAND nodes …
The first phase of this clean room is expected to be completed by the summer of 2019, with initial wafer output from the facility expected in the fourth quarter of calendar 2019. We are also building out incremental clean room space in our fab in Hiroshima, Japan, which will be available for production at the beginning of calendar year 2019. This clean room space will be used to continue our 1Y nanometer DRAM transition. For fiscal year 2018, we expect our capital expenditures to be in the upper end of our previously guided range of $7.5 billion, plus or minus 5%. Long term, we target capital expenditures as a percentage of revenue to be in the low 30% range.
Micron has cash on hand of nearly $8 billion. Free cash flow for the first half of the year was $4 billion, which equates to a run-rate of $8 billion. The company has ample cash and cash flow to fund its capital expenditure requirements. Its $4.2 billion capital expenditures through the first half of 2018 was exactly 30% of its total revenues. Maintaining this spend should not be a problem going forward.
In the short-term, capacity expansion could help meet customer demand requirements without being disruptive to DRAM and NAND prices. What happens if demand peaks or if Samsung or Hynix follows suit? NAND prices are already facing headwinds. If DRAM prices stagnate it could hurt the MU growth story.
Conclusion
This was another strong quarter for Micron. Declining NAND prices and the uncertain impact on DRAM from capacity expansion make MU a sell.
