Micron Technology, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Micron Technology, Inc. is a global leader in innovative memory and storage solutions, providing a diversified portfolio of memory technologies and products crucial for the data economy.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Micron operates primarily in the semiconductor memory and storage market, with a focus on DRAM, NAND, and NOR memory technologies. The company caters to a wide range of applications, from mobile phones and computers to data centers and embedded solutions in various industries. Here’s a breakdown of their revenue distribution by business unit in the first quarter of 2024:

  • Compute and Networking Business Unit (CNBU): This segment is the largest revenue generator, focusing on products for client, cloud, server, enterprise, graphics, and networking markets, with a revenue of $1.98 billion.
  • Mobile Business Unit (MBU): This segment includes memory products sold into the mobile and consumer markets, with a revenue of $1.42 billion.
  • Embedded Business Unit (EBU): This sector serves the automotive, industrial, and consumer embedded markets, with a revenue of $1.53 billion.
  • Storage Business Unit (SBU): This segment serves a variety of enterprise clients in addition to cloud and data center markets, with a revenue of $1.73 billion.

A notable aspect of Micron’s business is its global reach, with significant manufacturing facilities located in Taiwan, Singapore, Japan, the United States, Malaysia, China, and Italy. They strive to leverage this infrastructure to support their diverse customer base and supply chain.

Industry Trends: The semiconductor memory and storage market is known for its cyclical nature, driven by shifts in supply, demand, and pricing. Recent challenges in the industry include global macroeconomic uncertainties, such as trade tensions, inflation, and interest rate fluctuations, which often affect customer demand, and supply chain disruptions such as those caused by COVID 19. Other factors include increasing complexity in production technologies, and rising competition. The industry is also undergoing a shift towards more specialized and diverse applications for memory and storage components, such as AI, cloud computing, 5G technology, and advanced data analytics.

Financials: Here is an analysis of Micron’s financial situation based on their latest earnings for the first quarter of fiscal year 2024 (released December 2023) as well as its recent 10-K report for fiscal year 2023(ending on August 31, 2023).

  • Revenue: In the first quarter of 2024, Micron reported revenue of $4.73 billion, a decline from the $6.64 billion reported for the prior year quarter. This downturn was primarily caused by lower average selling prices and decreased shipments in DRAM and NAND memory. However, it still beat market expectations, which predicted revenue to come in at $4.70 Billion. For fiscal year 2023, Micron’s total revenue was $30.76 Billion.
  • Margins: Gross margin for first quarter 2024 was a negative 2%, compared to a positive 25.9% in the same period from a year ago. This downturn in margin was also primarily driven by lower average selling prices and increased input costs. This contrasts with the company’s net margin (which includes expenses) which was a loss of 18% in the first quarter of fiscal year 2024, compared to a profit of 21% in the same period from a year ago. For fiscal year 2023, the company had a net margin of a loss of 29%.
  • Profitability: The net income in the first quarter was a loss of $1.23 Billion (compared to a profit of $1.5 Billion from the same quarter of the previous year). This resulted in losses per share of $.12 for basic and $.12 for diluted. For fiscal year 2023, the company had a net loss of $5.8 Billion, which translates to -$5.32 loss per basic share. The company is predicting losses continuing throughout fiscal year 2024.
  • Cash Flows:
    • Operating cash flows were $1.46 Billion in the most recent quarter. Cash flows from operations in 2023 were $7.3 Billion.
    • Investing Activities saw a cash outflow of $2.2 Billion in the last quarter, as the company was investing in property, plant, and equipment. In fiscal year 2023, this was $12.1 Billion.
    • Financing Activities saw a net cash outflow of 1.4 Billion in the most recent quarter. In fiscal year 2023, this was a net cash outflow of $5.8 Billion.
  • Capital Expenditures: Micron is heavily invested in its future growth by continuing to make capital expenditures, especially in R&D and new technologies. A portion of their manufacturing capacity has been pushed back to 2025 because of this.
  • Debt: Long-term debt is $12 Billion in their latest reports, up from a total of $11 Billion from the previous quarter. The company maintains a level of leverage, mainly because it increases their financial flexibility.
  • Share Repurchases and Dividends: In 2023, the company repurchased around 18 million of its shares at an average of $56 a share. As of November 30th, 2023, the company paid out $.115 a share in quarterly dividends.

The above financials show that Micron has struggled recently, and is undergoing a period of losses. However, it should be noted that the company still has significant cash flow from operations, and is investing for future growth, even though that is increasing its capital expenditure. The company also maintains a stable debt level to maintain flexibility.

Competitive Landscape: Micron operates in a highly competitive industry that is dominated by a few giants like Samsung and SK Hynix. Other smaller competitors are also present in the market, but they typically have very niche positions. The cyclical nature of the industry creates extreme boom and bust cycles that benefit only a small portion of investors. Moreover, this industry is capital-intensive and constantly changing.

What Makes Micron Different:

  • Technological Leadership: Micron has a good portfolio of advanced memory and storage solutions, including state-of-the-art chip designs and manufacturing processes. This focus on pushing the envelope of technology can give them an advantage in the market.
  • Global Reach: The company has significant operations worldwide, which allows it to have better supply chains. This reduces the effect of local macroeconomic and supply chain shocks.
  • Strong Focus on Innovation: The company’s investments in R&D signal a strong commitment to creating a pipeline of new products, which can enable them to grab new growth opportunities.
  • Proprietary Manufacturing Techniques: Micron has been able to develop and perfect various fabrication and manufacturing techniques over time that allow them to compete and survive in an otherwise brutally competitive industry.
  • Relationships with Customers: The company is working on developing customized solutions for customers in multiple markets. This leads to high customer loyalty and retention.

Legitimate Risks to the Moat:

  • Technological Obsolescence: The technology landscape can change quickly, which could hurt Micron’s product portfolio if they do not adapt.
  • Intense Competition: The presence of companies like Samsung and SK Hynix creates a fiercely competitive landscape, leading to price pressures.
  • Industry Cyclicality: The semiconductor industry is famously volatile, which can create instability in revenue, margins, and cash flows.
  • Supply Chain Issues: Reliance on third-party suppliers may lead to operational disruptions.
  • Geopolitical Risks: The fact that Micron is a global company means that they are potentially affected by trade tensions, tariffs, and changes in laws in different countries.
  • Unpredictable Macroeconomic Environment: High inflation and unstable interest rates create a difficult environment that can put more financial strain on the company and its customers.
  • Debt: Even though the company has a relatively low-debt-to-equity ratio, it may still be a burden if cash flows from operations come under pressure for longer periods.
  • Customer Concentration: The company has several large customers and the loss of any of those may have a major impact on sales.
  • Poor Expansion Strategy: The company has often focused on trying to expand into non-memory sectors. As we can see in the past, the company does not have an advantage in these sectors and might see some of these expansions underperform, which in turn is a drag on overall profitability and ROIC.

Moat Rating: 3 / 5 Micron has a decent moat that stems from their manufacturing expertise, global reach, and proprietary process. But they are very dependent on their technological edge and this makes their position highly vulnerable to sudden shifts in tech. This is amplified by the inherent cyclicality of the industry, which may cause profitability to swing significantly. These factors makes for a narrower than the average moat, making them somewhat difficult to rate as a truly great company in the long term.

Understandability: 3 / 5 Micron’s business is fairly complex because of the rapid technological change that the semiconductor industry faces, making it slightly difficult for the average person to evaluate. However, the basic economic principles are easy to grasp-the supply and demand for memory and storage drives Micron’s revenue and profits, which are, at a basic level, very easy to understand.

Balance Sheet Health: 4 / 5 Micron’s balance sheet is relatively healthy, and it does not carry too much debt or other long-term liabilities. However, with negative net income and negative cash flow from investing, their current financial health is not great. But the company is aggressively investing for the future and is expected to rebound back in fiscal year 2025. So we give it a rating of 4.

Controversies & Problems:

  • Supply and Demand Imbalance: As seen in the recent financials, Micron is currently navigating industry headwinds with falling demand for their products and low prices, resulting in lower margins and revenue. This is a common event for all the semiconductor companies, but it is still worth noting because it reduces the company’s value at this point.
  • Memory Oversupply: There is an oversupply of memory on the market, which is negatively impacting prices. This causes Micron to sell products at lower margins to remain competitive.
  • CHIPS Act Funding: The company has been given incentives from government bodies, but may be subjected to scrutiny and potentially may have to return the fundings. Management sees this as a favorable opportunity as they are spending significantly on their production.

In conclusion, Micron is a well-established player in the semiconductor industry that is experiencing a very rough patch now, but is investing and preparing for the future. They have a decent moat based on scale advantages and access to resources, as well as a strong financial position, but these have come under pressure in the past few quarters because of industry headwinds and competitive pressures. The company has the potential to perform well in the long-term once the current issues fade away.