Why Micron Technology Isn't Done Growing Yet

By Harsh Chauhan Markets Fool.com

Shares of Micron Technology (NASDAQ: MU) have surged over 30% in 2017, thanks mostly to a favorable pricing environment that helped it post stellar second-quarter numbers. The maker of memory chips is riding the wave of tight supply and strong demand for DRAM (dynamic random access memory) and NAND chips, and it won't be running out of fuel anytime soon, if its latest outlook is any indication.

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Micron's third-quarter revenue could jump 86% year over year at the midpoint of its revenue guidance range of $5.2 billion to $5.6 billion, which seems achievable thanks to booming memory demand and robust pricing. In fact, the memory specialist's DRAM pricing shot up 21% last quarter, while NAND sales jumped 18%.

Image source: Getty Images.

Micron's favorable market dynamics should last beyond 2017, as it is gaining traction in fast-growing areas such as specialty and server DRAM, while supply will remain tight. Additionally, the company is on track to take advantage of the booming 3D NAND market, which could help sustain its impressive momentum.

A look at the demand side

Micron gets close to two-thirds of its revenue from DRAM chips, with server and specialty DRAM accounting for almost 45% of this segment. These two subsegments could substantially boost its sales in the long run, as they cater to fast-growing markets.

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Server DRAM, for instance, plays a critical role in helping data centers process large data volumes at fast speeds, allowing servers to take on more workloads and reduce operational costs. This is great news for Micron's server DRAM business, since server workloads will increase in leaps and bounds as data traffic grows.

Cisco forecasts a sevenfold increase in mobile data traffic until 2021, so data centers need to be upgraded using the modular approach for faster processing to tackle the growing volume. Modular data centers help bring additional capacity in small amounts, and can also be deployed in far-flung areas where permanent structures are not needed.

MarketsandMarkets estimates that modular data-center demand and related equipment sales could triple by 2020 as compared to 2015, indicating that server DRAM demand will increase. On the other hand, Micron's specialty DRAM segment should also accelerate thanks to fast-growing markets such as gaming and automotive.

In fact, Micron is already supplying its GDDR5X DRAM to NVIDIA for the latest GTX 1080Ti graphics card. This could be a big deal, as the latter company leads the booming graphics processing unit (GPU) market, which could double by the end of the decade. Not surprisingly, Micron believes that DRAM demand will grow at an annual pace of 20% to 25% until 2019.

Meanwhile, Micron's NAND flash business -- which is 30% of total revenue -- has a terrific catalyst in the form of 3D NAND. Allied Market Research forecasts that the 3D NAND space is set to grow at an annual pace of 33.7% until 2022, to $39 billion, as smartphone storage capacities increase. As a result, Micron is going to invest $1.7 billion on 3D NAND technology this year to ramp up output, as it doesn't want to miss the gravy train.

What about supply?

Micron's rivals Samsung and SK Hynix halted DRAM production in mid-2016 owing to an inventory glut, which led to a sharp price jump because they controlled almost 75% of the market. Micron used this time to improve its competitive position in DRAM by transitioning to a more efficient 18-nanometer node. As research company Market Realist points out, Samsung and SK Hynix will start moving to this platform in the second half of the year.

Micron's technology lead has given it an advantage over rivals; waiting times for the new equipment needed to make DRAM chips are pretty long, indicating that it can capture more market share. NAND supply, on the other hand, will also remain weaker than demand this year due to a 6% increment in wafer capacity, even as 3D NAND demand picks up pace.

Tighter supply means that Micron's favorable pricing environment will continue in both the DRAM and NAND segments, with IC Insights estimating that memory shipments and prices will increase 5.6% and 1.8% every year until 2021. This will push the market to a size of $110 billion from $77 billion in 2016, paving the way for Micron Technology's growth as it tries to grab a bigger slice of the memory market.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.