MU - Micron Technology Inc.

[K2SO]

I am looking at Micron, and it looks like a good little performer trading at a mid 6 PE. 

 

Beware investing in cyclicals like this on the basis of P/E. Counterintuitively, the time to buy these is usually when the P/E is high. You really need to understand the industry supply/demand dynamics.

 

 

[DTEJD1997]

I am looking at Micron, and it looks like a good little performer trading at a mid 6 PE. 

 

Beware investing in cyclicals like this on the basis of P/E. Counterintuitively, the time to buy these is usually when the P/E is high. You really need to understand the industry supply/demand dynamics.

There is an argument to be made that, "This time it is different" with Micron.

 

20+ years ago, there were maybe 20 manufacturers of DRAM.  Now I believe there are 3.

 

Perhaps even more importantly than that, there appears to be an informal agreement among the manufacturers to not act irrationally on  memory pricing.

 

An example of this behavior is the fact that DRAM pricing for desktops is up about 300% in the last 16 months.  At the low point, I was able to buy a 16gb memory kit from Micron for about $50-$60.  Today, that price is about $175 or so.  Over time, the price of memory usually goes down as efficiency kicks in. 

 

In the near term, my contacts claim that the price of memory will be flat OR will maybe come down by $10 or so.

 

In the past, the price of memory almost always went down.  Every once in a blue moon, price might spike up on demand or a factory/supply problem.  In 20+ years of buying memory, I've never seen pricing like we have had in the past 1.5 years.

 

So maybe, "it is different this time"?

[walkie518]

it's different until a player increases production for purpose of simply generating more income

 

today there is an increasing number of database transaction activities done in memory rather than on disk, ssd, and hybrids ... while the business isn't going anywhere for the foreseeable future, there will likely be swings in value as a result of tweaking the supply chain

 

I owned Micron and sold in the $30s...I am waiting for the next leg of the cycle to buy more.

[walkie518]

it's different until a player increases production for purpose of simply generating more income

 

today there is an increasing number of database transaction activities done in memory rather than on disk, ssd, and hybrids ... while the business isn't going anywhere for the foreseeable future, there will likely be swings in value as a result of tweaking the supply chain

 

I owned Micron and sold in the $30s...I am waiting for the next leg of the cycle to buy more.

[DTEJD1997]

it's different until a player increases production for purpose of simply generating more income

 

today there is an increasing number of database transaction activities done in memory rather than on disk, ssd, and hybrids ... while the business isn't going anywhere for the foreseeable future, there will likely be swings in value as a result of tweaking the supply chain

 

I owned Micron and sold in the $30s...I am waiting for the next leg of the cycle to buy more.

 

I think there is a strong case to be made that "this time it is different" with MU.

 

I didn't think that way in the past, but I'm convinced now for TWO reasons.

 

#1

 

I've been working with/building/selling computers for over 20 years now.  Sometimes it is a hobby, sometimes it is my main source of income.  In all the time I've been working with them, I've NEVER seen memory prices do what they have done over the past 18 months.  NOT EVEN CLOSE.  It is simply unprecedented that DRAM prices would TRIPLE and stay that way for a good period of time.

 

#2

 

As time progresses, the number of memory manufacturers continues to get smaller & smaller.  At this point, there are only 3.  It is so much easier for 3 manufacturers to act "rationally" than it is for 7,10,15, or even 20.

 

Sure, the Chinese might get into this area, but the cost of setting up a foundry is hundreds of millions of $, perhaps even a billion.  That is going to keep a lot of competitors out.  If they do come in, they will likely act rationally.

 

I don't think we will ever get back to having 10 or a dozen different manufacturers.

 

Finally, if MU is making money at the clip they have been recently...that is going to change things real fast.  A stock simply won't trade for a P/E of 4 in a normalized market.

 

We will see, but real money is to be made when the normal way of doing business has radically changed.

 

[walkie518]

it's different until a player increases production for purpose of simply generating more income

 

today there is an increasing number of database transaction activities done in memory rather than on disk, ssd, and hybrids ... while the business isn't going anywhere for the foreseeable future, there will likely be swings in value as a result of tweaking the supply chain

 

I owned Micron and sold in the $30s...I am waiting for the next leg of the cycle to buy more.

 

I think there is a strong case to be made that "this time it is different" with MU.

 

I didn't think that way in the past, but I'm convinced now for TWO reasons.

 

#1

 

I've been working with/building/selling computers for over 20 years now.  Sometimes it is a hobby, sometimes it is my main source of income.  In all the time I've been working with them, I've NEVER seen memory prices do what they have done over the past 18 months.  NOT EVEN CLOSE.  It is simply unprecedented that DRAM prices would TRIPLE and stay that way for a good period of time.

 

#2

 

As time progresses, the number of memory manufacturers continues to get smaller & smaller.  At this point, there are only 3.  It is so much easier for 3 manufacturers to act "rationally" than it is for 7,10,15, or even 20.

 

Sure, the Chinese might get into this area, but the cost of setting up a foundry is hundreds of millions of $, perhaps even a billion.  That is going to keep a lot of competitors out.  If they do come in, they will likely act rationally.

 

I don't think we will ever get back to having 10 or a dozen different manufacturers.

 

Finally, if MU is making money at the clip they have been recently...that is going to change things real fast.  A stock simply won't trade for a P/E of 4 in a normalized market.

 

We will see, but real money is to be made when the normal way of doing business has radically changed.

 

I build rigs too. 

 

Not sure if this is the time/place to bring up DDR4 as incremental improvement to DDR3, but next gen memory will not be engineered like DDR3 and DDR4 anymore--there will be a bigger step up as planar went 3d for ICs.

 

That said, memory is in need and database transactions are much, much faster in memory than in any form of storage.  Maybe a hybrid product bridges the gap, maybe mainboards got he way of the dodo to better SoC designs.  Getting memory and other peripherals closer to processing is and has been the goal for decades, I don't see this changing.

 

I agree that the competitive landscape has changed, but I also think it's unlikely to remain as it is.  There is simply too much need and demand for product for there not to be continued price swings among the suppliers.  Some or all parties will need to make more to accommodate need. 

 

[Spekulatius]

Why is spending a few hundred or even a billion dollar considered a hurdle for Chinese? It’s pocket change, if the government decides they want some of their champions to go down that road.

[walkie518]

Why is spending a few hundred or even a billion dollar considered a hurdle for Chinese? It’s pocket change, if the government decides they want some of their champions to go down that road.

The Chinese need the IP to match Samsung and Micron, but how long will it take and how much will they need to invest?

[ritrading]

Stayed away from semiconductors in all my years of investing, but start researching last week after seeing MU at about 5 P/E. With respect to capital, semiconductor companies look like oil companies. There's an enormous upfront capital investment, and then the marginal cost of manufacturing is relatively minuscule, resulting in 24/7 operations to maximize usage of the equipment. Then, dumping product into the market as a price taker, with little ability to store inventory due to the the trend of declining prices and risk of being obsolete. Difference I see with oil companies is that semiconductor companies are more likely to need to upgrade equipment frequently due to new innovation.

 

My hesitations with MU right now are the enormous fluctuations with revenues, net income, and free cash flow. Is the 5 P/E even cheap? It kinda looks like the revs, NI, FCF are at the top of a cycle, and MU will turn very expensive once these peaks move to troughs.

[DTEJD1997]

Stayed away from semiconductors in all my years of investing, but start researching last week after seeing MU at about 5 P/E. With respect to capital, semiconductor companies look like oil companies. There's an enormous upfront capital investment, and then the marginal cost of manufacturing is relatively minuscule, resulting in 24/7 operations to maximize usage of the equipment. Then, dumping product into the market as a price taker, with little ability to store inventory due to the the trend of declining prices and risk of being obsolete. Difference I see with oil companies is that semiconductor companies are more likely to need to upgrade equipment frequently due to new innovation.

 

My hesitations with MU right now are the enormous fluctuations with revenues, net income, and free cash flow. Is the 5 P/E even cheap? It kinda looks like the revs, NI, FCF are at the top of a cycle, and MU will turn very expensive once these peaks move to troughs.

 

There is one problem with your assumption set...

 

In the past 18 months or so...MU has been a price SETTER, not a taker!

 

The price of DDR4 ram has approximately tripled...I've been working with computers/IT equipment for 25+ years and have NEVER seen this happen.  Memory pricing has been a downward slope with the odd spike up.  I've never seen price be this strong, for this long.

 

There are now 3 (or is it 4) memory producers.  It is MUCH easier for them to act as a cartel than in years past when there were a dozen or more producers of memory.

 

I would think that MU SHOULD trade a discount, but maybe not as much as "the street" thinks, as it appears that pricing on memory is much more rational than it has ever been.

 

Interesting times ahead and we'll see!

 

 

[ritrading]

I am looking at Micron, and it looks like a good little performer trading at a mid 6 PE. 

 

Beware investing in cyclicals like this on the basis of P/E. Counterintuitively, the time to buy these is usually when the P/E is high. You really need to understand the industry supply/demand dynamics.

 

Could you elaborate on this? I'm suspicious that the currently low P/E is not a accurate representation of MU.

[jouni1]

I am looking at Micron, and it looks like a good little performer trading at a mid 6 PE. 

 

Beware investing in cyclicals like this on the basis of P/E. Counterintuitively, the time to buy these is usually when the P/E is high. You really need to understand the industry supply/demand dynamics.

the last time i read this on the forum it was the FCAU thread

[saltybit]

What do people think of Micron at these levels? It's down 7% today

[Pelagic]

What do people think of Micron at these levels? It's down 7% today

 

Surprised there isn't more discussion on Micron. By just about any measure that incorporates earnings this looks cheap. Couple that with an up to $10B share buyback authorized and their plan to return 50% of FCF (roughly $4B over the last year) and your yield as a buyer today at a $37B EV is attractive.

 

Markets are forward looking and have sold MU off considerably over the past month based on the fear of declining earnings due to lower NAND pricing and tariffs. I guess the way I'm looking at this is what can we reasonably expect earnings to decline by and does MU with roughly 20% less shares outstanding still look attractive after that? 30%? 50%? More?

[mcliu]

How do you know what normalized earnings are? It's been all over the place over the last 10 years..

[DTEJD1997]

I am looking at Micron, and it looks like a good little performer trading at a mid 6 PE. 

 

Beware investing in cyclicals like this on the basis of P/E. Counterintuitively, the time to buy these is usually when the P/E is high. You really need to understand the industry supply/demand dynamics.

the last time i read this on the forum it was the FCAU thread

 

The time to buy deep cycle stocks is indeed <i>usually</il> when they have a high P/E and are at/near the bottom of the cycle.  HOWEVER, there were/are reasons to believe that both MU and FCAU were not at the peak of the cycle OR that "things were different this time".

 

In the case of MU, the industry was traditionally subject to irrational pricing by an industry participant trying to grab market share.  That was the case in the 80's, 90's, 00's...now, there are LESS than a handful of players...and they seem to calmed down and were focused on profitability.  I had been involved with IT equipment as either a hobby or full time job for 20 years, and I've NEVER seen what has gone on with memory in the last 18 months.  Prices on some types of RAM more than TRIPLED over time.  How could MU simply NOT mint $$$?

 

As with FCAU, sure, they operate in a rough industry.  Sure, they should trade at a discount to the market...but they are making a LOT of money.  They are making SO MUCH money that every quarter that they manage to keep it up, makes a big difference.

 

Another huge difference with FCAU vs. their past history is that their balance sheet is so much better now than what it had been in the past.  Finally, management of FCAU seems to be the most disciplined in the industry.  Most of their decisions consider results for profitability & shareholders.  They are financially rational now (not always the case in the past).

 

Also, who is to say where we are in the cycle?  We are certainly closer to the end than the beginning.  Once again though, if FCAU gets 4 more good quarters...they are making so much money that it is going to make a HUGE difference.

 

Also, I think a lot of people think that the next downturn is going to be a repeat of the GFC in 08.  I think there is a GOOD CHANCE that it will not be as bad.

 

So that is why I would posit that MU & FCAU may be possible investments even late in the cycle.

[skanjete]

Pabrai has built a considerable stake in this company.

 

Does anyone has a view on his possible motivation for it, and why now at this point in the cycle?

[ValuePadawan]

These are just my thoughts but he bought it at 1x Book Value.

 

DRAM is an oligopolistic business with three companies Micron, SK Hynix and Samsung controlling around 95% of the market.

 

Not to mention more people are buying more devices that require more DRAM storage every year. 5G devices need a lot more DRAM than 4G not to mention the extra computing power in cloud storage and if autonomous driving ever enters the market all those cars essentially become moving giant computers.

 

Recently Pabrai made comments saying he looked at the owners earnings of the business as a main reason for buying and said something like he expects Micron to be a long term compounder.

 

I'm assuming he sees a long runway for Micron and buying a company with a large runway for 1xBV with a strong moat doesn't seem too foolish to me.

[RadMan24]

These are just my thoughts but he bought it at 1x Book Value.

 

DRAM is an oligopolistic business with three companies Micron, SK Hynix and Samsung controlling around 95% of the market.

 

Not to mention more people are buying more devices that require more DRAM storage every year. 5G devices need a lot more DRAM than 4G not to mention the extra computing power in cloud storage and if autonomous driving ever enters the market all those cars essentially become moving giant computers.

 

Recently Pabrai made comments saying he looked at the owners earnings of the business as a main reason for buying and said something like he expects Micron to be a long term compounder.

 

I'm assuming he sees a long runway for Micron and buying a company with a large runway for 1xBV with a strong moat doesn't seem too foolish to me.

 

I think the long term compound story is lost in the cyclical nature of the business. Interesting perspective nonetheless and one that might be worth delving into should shares take a hit to lower levels in the future.

[skanjete]

Thanks for the reply.

 

Well, if it is indeed a compounder going through a cyclical dip, it would be a great opportunity at these prices. A really great opportunity.

 

My problem is that I'm afraid I don't really understand the business. What differentiates Micron from Hylux and Samsung?

Do they have a competitive advantage? Are there any industrial threaths, trends or new technology on the horizon that could possibly destroy the business?

 

Does anyone has more background information on the industry or a reference to an interesting analysis or book so I could delve deeper into it?

 

 

 

[DTEJD1997]

Hey all:

 

The price of RAM has gone down a LOT in the past 6 months or so.  A bit over 50% perhaps?

 

The price of RAM is now back to where it was before the price spiked up.

 

So unless MU has gained new efficiency and/or sales volumes have TREMENDOUSLY spiked, earnings will probably be under pressure.

 

Prices also seem to be going down and solidly so.  Memory produced by MU is frequently the lowest price that I encounter.  Perhaps MU is trying to take market share?

[Spekulatius]

Hey all:

 

The price of RAM has gone down a LOT in the past 6 months or so.  A bit over 50% perhaps?

 

The price of RAM is now back to where it was before the price spiked up.

 

So unless MU has gained new efficiency and/or sales volumes have TREMENDOUSLY spiked, earnings will probably be under pressure.

 

Prices also seem to be going down and solidly so.  Memory produced by MU is frequently the lowest price that I encounter.  Perhaps MU is trying to take market share?

 

Or they are behind in technology ( RAM feature size , power consumption etc) as they used to be. Is it still true that MU manufactures using trailing edge process tech, while Samsung has jumped to leading edge technology a coupe of years ago.

[ValuePadawan]

The price has dropped a lot because the big three expanded production capacity when prices were rising. Supply grew faster than demand and prices have fallen but since they started dropping all three companies have slowed capacity growth allowing demand the ability to catch back up.

 

It would be foolish for any of the big three to slash prices in order to gain market share it would be disadvantageous to all producers.

 

skanjete- Something to be wary of is that the Chinese government very much wants a Chinese DRAM producer so their tech sector isn't so reliant on Korea and the US to make things like mobile phones, servers basically anything that needs RAM.

 

There are two ways they can do this. R&D or as some Chinese companies call it RD&T (theft). The last time they tried stealing IP on how to make DRAM the U.S b**** slapped that company so hard they had to close down.

 

https://www.anandtech.com/show/13537/us-doc-sides-with-micron-bans-exports-to-chinese-dram-maker

 

If they instead have to develop the capability with hard work and research and development they not only have to catch up to where DRAM producers are now, but where DRAM producers are going as chips become ever more efficient and harder to produce, needless to say its an uphill endeavour. This is not flooding the world with blast furnace steel or cheap plastic toys, these are the most state of the art fabrication facilities with very complex production methods that I think will take time to develop organically.

 

If China ever does produce a Chinese DRAM manufacturer I'd hope that Micron and Hynix see sense and merge to keep the number of players at 3 but this is looking out a decade and very speculative.

 

Does anyone have knowledge about DRAM production and how Samsung and Hynix stack up against Micron? Quality, specs, who's the most advanced research-wise?

[Guest eatliftinvestgolf]

I am building a personal position in MU via out of the money LEAPs since it is currently an opportunity rich environment.  I would plan to exercise and hold the stock longer-term if thesis is correct.  I think the fair value on this company is more than $100 BN enterprise value today and growing.

 

Elements of my thesis below... some of which already has been mentioned in the thread.

 

- very healthy long-term returns on tangible capital

- long-term consolidation helps to enhance investment and supply dynamics in memory to protect margins

- geopolitically, ability to manufacture critical technology components only growing in importance; Micron is last major co. standing in memory with a North American nexus (even if they produce much outside the U.S.)

- management is for real. very impressed with the recent strategy presentations and the business trajectory over last five year

- huge scale requirements in a cyclical industry leading to protection against new entrants

- good capital allocation: they do acquisitions in the down cycle to further consolidate the industry, have been investing sufficiently internally in R&D to grow future value, and have been smartly retaining earnings in the up-cycles to de-lever

- ability to add value on top of what was previously an extremely tough commodity business

- overlooked by the market because it is hardware, not software. software is all the rage.  Venture capitalists don't want to fund a hardware competitor because it's boring.

- long-term, absolutely fundamental to several very long-term secular trends that look to accelerate due to COVID-19 (gaming, cloud, etc.)

- likelihood of being mispriced: screens poorly on simple metrics due to recent cyclical lows in memory pricing (P/E, etc.)

- no net debt, lower risk during period of economic uncertainty

[shamelesscloner]

I am building a personal position in MU via out of the money LEAPs since it is currently an opportunity rich environment.  I would plan to exercise and hold the stock longer-term if thesis is correct.  I think the fair value on this company is more than $100 BN enterprise value today and growing.

 

Elements of my thesis below... some of which already has been mentioned in the thread.

 

- very healthy long-term returns on tangible capital

- long-term consolidation helps to enhance investment and supply dynamics in memory to protect margins

- geopolitically, ability to manufacture critical technology components only growing in importance; Micron is last major co. standing in memory with a North American nexus (even if they produce much outside the U.S.)

- management is for real. very impressed with the recent strategy presentations and the business trajectory over last five year

- huge scale requirements in a cyclical industry leading to protection against new entrants

- good capital allocation: they do acquisitions in the down cycle to further consolidate the industry, have been investing sufficiently internally in R&D to grow future value, and have been smartly retaining earnings in the up-cycles to de-lever

- ability to add value on top of what was previously an extremely tough commodity business

- overlooked by the market because it is hardware, not software. software is all the rage.  Venture capitalists don't want to fund a hardware competitor because it's boring.

- long-term, absolutely fundamental to several very long-term secular trends that look to accelerate due to COVID-19 (gaming, cloud, etc.)

- likelihood of being mispriced: screens poorly on simple metrics due to recent cyclical lows in memory pricing (P/E, etc.)

- no net debt, lower risk during period of economic uncertainty

 

You are investing in good company... Mohnish Pabrai, David Tepper, Guy Spier, Li Lu, Prem Watsa