27 Aug Micron Technology (MU)
We’re heading back into the semiconductor industry today – or the computer chip industry as it’s called in layman’s terms. It’s an industry that has been experiencing a major shortage of supply over the last few years which has had further implications on sales of everything from cars to phones to kitchen appliances. Many have presumed that the tough times are now ending and chips will be plentiful going forward, and some stocks, such as our subject today, have sold off in response. However, there is every chance the supply shortage is set to continue for at least another year and it seems to be a great time to pick up this quality stock at a nice discount.
Many have thrown the blame for the global chip shortage onto the covid 19 pandemic. However, it was actually the US-China trade war that kicked things off. At the start of 2020, the US government placed restrictions on Semiconductor Manufacturing International Corporation (SMIC), China’s biggest chip manufacturer, which meant they could not sell to company’s with links to America. It meant companies that needed chips for their products needed to buy from somewhere else, however, these other companies were already producing at maximum capacity.
Then the global pandemic hit. Global lockdowns saw manufacturers of semiconductors shut down with it. Production was halted. This coincided with more people staying at home and increased demand for electrical entertainment and equipment needed to work from home, from computer games to tablets to PC’s, webcams, and monitors. Demand was up and supply was down. To make matters worse, when vaccines were starting to be produced the vials used to hold them were made from silicon. The same silicon used to make computer chips. This caused the cost of the metalloid to rise substantially.
To add to the woes a drought in Taiwan during 2021 has also had a major impact. Taiwan is meant to be one of the rainiest places on earth, a place where it rains so often businesses leave umbrellas out for the public to borrow and leave at the next place they visit. Monsoons are common in summer, but this year there has been no monsoons and no rain. A cause of climate change perhaps. So what does this have to do with computer chips? Well, the chip manufacturers need massive amounts of ultra-pure water to produce and clean devices and factories. And 90% of the most advanced microchips are produced in Taiwan.
The shortage has been a massive boost for today’s stock subject Micron Technology. Revenue in the last quarter jumped 36% year over year, while profit went from $0.82c per share to $1.88, more than doubling. The guidance also suggests they’ll get to $8.2 billion in revenue in the current quarter, which will be another 36% gain year on year. Despite this, the share price has continued to slide. It was up around $97 in April but is now trading just above the $70 mark.
Micron is an American producer of computer memory and data storage through its “dynamic random-access memory” (DRAM) and NAND flash memory products. It markets its products under the brands Crucial and Ballistix. Its focus is to produce smarter and more expensive chips to supply high-end products that smaller companies can’t manage. It’s currently locked in a three-way battle with Samsung Electronics and SK Hynix to continually produce the next powerful computer chip. It was first to market in the 176 layer NAND in late 2020, and again with the 1-alpha DRAM at the start of 2021. However, the new battle is over extreme ultraviolet technology or EUV.
The fight to produce EUV on mass is a costly one. Micron expects capital expenditure to increase from $9 billion to $9.5 billion this year. I suspect that this has been a major reason for the falling share price. However, Micron is flush with cash – $9.8 billion at last count. And with a few profitable quarters pretty much locked in it’s a great time to be investing in the future. Investing in higher value chips now will mean higher margins going forward, and a product that is less prone to price drops when demand finally catches up with supply.
Memory chip demand is expected to increase for at least another couple of years. They are needed in everything from PlayStations and Xboxes to fridges and washing machines, smartphones, toothbrushes, cars and aeroplanes. Demand will remain high and supply will continue to be constrained.
The car industry is a great example. Car sales across the globe have plummeted. Not because the demand hasn’t been there but because they haven’t been able to get their hands on the chips that are needed in their cars. Just last week the world’s biggest car producer Toyota announced it was reducing its global production in September by 40% because of critical semiconductor shortages. And this is from a company that had the common sense to stockpile chips thanks to a business continuity plan in case of an unforeseen shortage. The car industry quickly transitioning to electric vehicles has made supply even worse. Electric cars need semiconductors that are more powerful and efficient, to achieve longer distances from their batteries. Smarter cars need smarter chips and demand will only increase in the future.
Micron is in a great place at the moment. It’s in an industry in great demand and it’s a market leader with enough power behind it to stay at the top. Its success has been underappreciated by Wall Street over the last six months which has resulted in a 20% price fall when it should have been moving higher. The analysts agree, with price targets averaging $105 per share following the company’s latest earnings call. A share price in the low $70s looks like a great jump on point for the next few years. Anything lower is just a bonus.