Micron: GPT cools down, storage bottoming rebound remains unaffected.

Dolphin's previous article mainly focused on the situation of the storage industry. The article mentioned that "the storage industry has a cyclical nature, and we are currently at the bottom of the cycle". When standing at the bottom of the industry, investments still need to be based on individual companies.

The global leaders in the storage industry are mainly Samsung, Hynix, and Micron Technology, Inc., which occupy more than half of the market. Compared to Hynix and Samsung, which are listed in South Korea, Micron, listed on NASDAQ, is a viable investment option. To seize the opportunity of the storage industry bottoming out, Micron is worth paying attention to.

Dolphin mainly focuses on Micron Technology itself in this article and explores the following two aspects: ① when will Micron's performance bottom out and recover, and ② Micron's expected performance and investment value.

1) Micron's Performance Bottoming Out Judgment: Through model decomposition, Dolphin expects Micron's performance to improve sequentially next quarter and to turn losses into profits in the second half of the year;

2) Micron Technology's Expected Performance: Combined with the expectation of the storage industry bottoming out, Dolphin estimates that the company's net profit for FY2023-2025 will be -$4.2/3.1/5.5 billion, with YoY growth rates of -147.9%/173.8%/77.6%, respectively. In the current fiscal year, the company has been greatly affected by the industry's decline. Profit is expected to recover from next year onwards;

3) Investment Value Judgment: ① The current rise in the company's stock price has already incorporated some expectations of performance recovery. If the recovery exceeds expectations or profits earlier than expected, the stock price is likely to continue to rise; ② From the perspective of PB and PE ratios, Micron is still below the median valuation and has the potential to continue to rise. Although the current stock price has rebounded to a certain extent, Dolphin estimates that the company still has room for upward recovery.

The storage industry has cycles, and Micron has the opportunity to continue to rise with the recovery of the cycle. At the same time, due to the cyclical nature of mature industries, the company's elasticity and upward space are limited.

Below is the specific analysis of Micron Technology by Dolphin:

To estimate Micron Technology's performance, we must first look at the company's business composition to estimate its revenue situation. According to the latest Micron report, the company's business still mainly revolves around DRAM and NAND, which together account for 97.7% of the total. Therefore, revenue estimation is mainly calculated based on DRAM and NAND.

I. When can Micron turn positive?

As storage prices continue to decline, the company posted a loss of $2.3 billion in the latest quarter. This is the second consecutive quarter of loss and the largest loss in nearly 20 years. Faced with such a large loss, when can the company stop the bleeding and turn a profit?

First, we need to analyze the reasons for the $2.3 billion loss this quarter, mainly caused by product price reductions and inventory impairment. Under the high pressure of inventory, the company did nearly $1.4 billion in inventory processing this quarter. Excluding this impact, the company's operating losses narrowed to $900 million and the actual gross profit margin was 5.2%.

As storage prices have dropped, Micron Technology's gross profit margin has fallen from over 20% to around 5%. This indicates that the storage industry as a whole has fallen close to the breakeven point. If storage prices continue to decline, it will be difficult for the industry and companies to bear. Therefore, there is little room left for storage prices to continue to decline.

1.1 Revenue Expectations

1) DRAM Revenue: Mainly depends on the bit shipments and price of DRAM.

① Price: DRAM prices have continued to decline by double digits MoM and the price per unit bit has fallen below $0.3. According to Trendforce and other organizations, DRAM prices will continue to fall by 10-15% next quarter, but the decline will narrow. Dolphin Jun expects DRAM prices to have the chance to stop falling and rebound at the end of the year.

② Bit shipments: Micron's DRAM shipments also declined in the latest quarter, mainly due to weak downstream demand resulting in reduced industry chain pulling power. However, looking at the market over a longer period of time, demand for DRAM is increasing.

Taking into account the price and shipment situation of DRAM, Dolphin Jun expects DRAM revenue to begin to recover MoM, with quarterly revenue expected to exceed $3 billion at the end of the year.

2) NAND Revenue: Mainly depends on the bit shipments and price of NAND.

① Price: NAND prices may stabilize before DRAM. Although NAND prices have also declined MoM, the decline in prices is expected to narrow to single digits next quarter. Dolphin Jun expects NAND prices to rebound earlier than DRAM, possibly in the second half of the year.

② Bit shipments: Micron's NAND has shown a trend of MoM improvement in most quarters. The recent decline in shipments is mainly due to high inventory levels in the industry chain reducing pulling power. With the reduction of inventory, NAND will return to a good pace of pulling power.

Taking into account the price and shipment situation of NAND, Dolphin Jun expects NAND revenue to warm up MoM. However, due to the sharp decline in prices before, the YoY level will still be down for the whole year. In the second half of the year, quarterly NAND revenue is expected to exceed $1 billion.

Combining the projected revenue of DRAM and NAND, Dolphin expects Micron's revenue to rebound and quarterly revenue to exceed $4 billion by the end of the year.

1.2 Gross Margin and Expense Ratio Expectations

1) Gross Margin: Micron posted a historically low gross margin of -32.7% last quarter, which is almost certainly the main reason for the quarter's loss. If the $1.4 billion inventory write-down is included, the gross margin for the last quarter would have been around 5%.

So, what about next quarter? Micron's gross margin guidance is -21%, which includes lower prices for products and continued inventory write-downs. As a result, Micron is still expected to sustain a loss next quarter.

From the perspective of product prices continuing to drop next quarter, while the gross margin improves from the previous quarter, there should be a reduction in inventory write-downs next quarter. After experiencing consecutive inventory write-downs, Dolphin believes that Micron's inventory situation will improve significantly in the second half of the year, and the gross margin should return to a relatively reasonable level of over 20%.

2) Expense Ratio: Due to the downturn in the industry, Micron's performance has declined, but the expense ratio has remained relatively fixed, resulting in a recent increase in the expense ratio. Considering the company's situation, Dolphin expects Micron to continue to reduce sales, administrative, and R&D expenses to minimize the impact of expenses on profitability. When the company overcomes its difficulties and becomes profitable again, expense control may be relaxed.

1.3 Net Profit Situation

Based on the above expectations for the company's revenue, gross margin, and expense ratio, Dolphin estimates Micron's net profit situation. Dolphin believes that Micron will continue to sustain significant losses next quarter but may return to profitability in the second half of the year.

Therefore, Micron's profitability will begin to improve from next quarter, but the company will have to wait until the second half of the year to become profitable again.

2.1 Micron's Expected Performance and Investment Value

2.1 Micron's Expected Performance

The forecast for Micron's performance is mainly about the company's future annual performance, with a focus on expectations for revenue, gross margin, and operating expenses.

①Revenue Side: The main focus is still on storage product shipments and prices. Dolphin believes that the increase in basic data needs will continue to drive demand for storage; storage prices have already entered the industry's loss range, and there is little room for further decline. Due to the cyclical nature of the storage industry, Dolphin believes that storage prices will begin to rise from the second half of this year and the upward cycle will last for 1-2 years.

2）Gross profit margin: The sudden drop in short-term gross profit margin is due to inventory impairment, but it will still be positive after excluding the impact. In the second half of the year, as storage prices rise, the company's gross profit margin will also have an opportunity to improve. Micron's reasonable range for long-term gross profit margin is around 20-40%.

3）Expense ratio: Under the current pressure on the company's operations, the company will continue to control expenses in the short term. As the company emerges from the crisis, the company's operating expense ratio will return to a normalized level of 15-20%.

Based on the above assumptions, Dolphin estimates Micron Technology's performance for the next three fiscal years to be -4.2/3.1/5.5 billion US dollars, with a year-on-year growth rate of -147.9%/173.8%/77.6%. It can be seen that Micron Technology is at the bottom of the industry this fiscal year, and there will be significant losses on the performance side. As the company and the industry emerge from the bottom, Micron will start making money again.

2.2 Judgment of Investment Value

1）Performance inflection point: Based on the above calculations of Micron Technology's quarterly and annual performance, Dolphin believes that Micron is about to usher in an upward inflection point in performance, and will return to profitability in the second half of the year. The current stock price has risen from around $50 to $60, partly reflecting the market's expectation of performance recovery. When the performance exceeds expectations in repair or turns losses into profits, the stock price is still expected to continue to recover. Market expectations for recovery often precede recovery on the performance side.

2）PB angle: As Micron Technology is an IDM with heavy asset model, PB valuation can also provide some reference for the company. When the market expects the company and the industry to decline, PB clearly declines and falls below 1. Now, with the market expecting the company to recover, PB has risen from around 1 to around 1.4, still slightly lower than the 1.5 midpoint of the valuation.

As the storage industry recovers, the company's PB is expected to recover to the range of 1.6-1.9, and the company's upward space still has 14-33%.

3）PE angle: As the current fiscal year is at the bottom of the industry, the company may experience annual losses, making it difficult to measure with PE. Based on Dolphin's calculations above, Micron is expected to make profits of 3.1/5.5 billion US dollars in the next two fiscal years, with a median annual profit of about 4.3 billion US dollars.

Referring to Micron Technology's historical PE situation, the midpoint of the company's PE is about 19. With reference to PE at around 19 times, the estimated market value of the company is about 81.7 billion US dollars, the corresponding stock price is 74.7 US dollars/share, with an upward space of about 20% compared to the current price.

Overall, Micron Technology's current stock price has recovered somewhat, but the turning point in performance has not yet truly arrived and the company's profits are expected to turn positive in the second half of the year. Combining the PB and PE ratios, Dolphin estimates that as the storage industry rebounds, the company's stock price still has some room for growth. At the same time, because storage has obvious cyclical characteristics as a mature industry, the stock price performance is difficult to make major breakthroughs. Based on performance and valuation considerations, Dolphin estimates that Micron Technology has about 20% upwards potential.

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Risk Disclosure and Statement of this Article: Dolphin Investment Research Disclaimer and General Disclosure