Must-know: Micron’s strategy to expand margins

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Impressive revenue growth and margin expansion

In FY14, Micron Technology, Inc. (MU) reported $16.4 billion in revenues, an increase of ~80% year over year. It reported an EPS of $2.54 in 2014 as compared to $1.13 in FY13. The company’s margins also increased considerably, ultimately benefitting its share prices.

As the chart below shows, Micron’s stock price increased 89.6% over a 52-week period ended Oct1, 2014. This achievement made Micron one of the best performing stocks in the S&P 500. Microchip Technology Inc’s (MCHP) announcement about a possible correction in the semiconductor industry caused Micron’s stock to fall, along with other leading players such as Intel Corporation (INTC).

stock price

Micron’s revenue growth has exceeded the industry average of 2.9%. Slower-than-expected PC shipments, the acquisition of Elpida, increased average selling prices of DRAM and NAND, and exponential growth in big data, smartphones, and mobile have collectively contributed to Micron’s growth.

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There is still room for margin expansion in Micron’s case. Its mid-30s gross margin range is lower than other leading players including Samsung Electronics Ltd (SSNLF) and SanDisk Corporation (SNDK). Its DRAM segment generates margins in the high 30% range, while NAND generates a margin in the high 20% range.

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SanDisk, a pure-play NAND products manufacturer, is mainly focused on triple-level cell, or TLC, NAND that costs 20% less than Micron’s NAND chips. SanDisk earned a 51% gross margin in 2Q14. This suggests there is still room for improvement in Micron’s margins as it shifts its focus towards TLC NAND.

As the chart above shows, past decline in average selling price is the main contributor to dips in Micron’s margins. As a leading player, Micron is positioned to benefit from the supply-demand imbalance. If the company takes advantage of this gap, its margins could expand.

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