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Why Is Micron’s Capital Spending Important for Investors?

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Memory chips are commodities, and Micron Technology (MU) competes in this market. Because Micron is looking to reduce its cost and technology gap with rivals Samsung and SK Hynix, it is focusing its capital spending on technology transition.

In the memory space, companies strive to achieve power efficiency. This is because memory chips are used in devices like mobile phones that have power limitations.

Moreover, memory chips need to be small and have a low cost per bit. As memory prices are governed by supply and demand, chipmakers look to reduce the cost per bit to gain an advantage over their rivals.

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Where is Micron focusing its capital spending? 

Micron is among the world’s top three memory chipmakers and competes with Samsung and SK Hynix. It manufactures memory chips for PCs, mobile and IoT (Internet-of-Things) devices. It also manufactures NAND (negative AND) and NOR flash memory for mobile phones, SSDs (solid-state drives), and related products.

The growing adoption of AI (artificial intelligence), gaming, autonomous vehicles, and 5G (fifth generation) is increasing the demand for high-performance, low-power memory. In DRAM, Micron is investing in advanced process nodes to improve density and performance. In NAND, it is investing in high-value solutions that have higher storage capacity.

Why should investors care about Micron’s capital spending?

Micron increased its capital spending from $3.1 billion in fiscal 2014 to $8.8 billion in fiscal 2018. This investment helped the firm reduce its costs and increase its net margin from 15.9% to 46.0%.

The company also reduced its debt and repurchased stock during the 2017–2018 memory upturn to strengthen its balance sheet. Higher margins and lower debt helped Micron increase its ROIC (return on invested capital) from 16.8% in fiscal 2014 to 42.4% in fiscal 2018.

This improvement came although the company increased its capital spending. This trend shows that advanced technology helps a memory chipmaker generate higher returns during a memory upturn.

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However, delays in ramping up production on advanced technology could significantly impact Micron’s ability to generate expected returns on capital spending. So, the firm has focused on accelerating its production ramp-up. It expects to spend $9 billion in fiscal 2019 on technology node transitions and product enablement.

Micron develops new technologies in partnership with other companies such as Intel to distribute its development costs. However, Micron is buying Intel’s stake in IMFT (Intel Micron Flash Technologies) in fiscal 2019, which should increase Micron’s capital spending next year.

Micron expands in Singapore and India 

Micron has assembly, fabrication, and R&D (research and development) facilities in the United States, Singapore, Taiwan, Japan, Malaysia, and China. In August, the chipmaker expanded its Singapore facility to accelerate the transition to advanced 3D NAND technology. It has added 600 jobs in Singapore and plans to add another 1,500 jobs in the next few years.

Micron is building its R&D capabilities in India to support its global manufacturing operations. It has hired 500 employees and plans to hire another 2,000 employees in the coming years. This investment comes as memory end markets diversify beyond PC and mobile to the data center, cloud computing, IoT, and autonomous vehicles. These markets have different storage and memory requirements, and Micron looks to cater to all of them.

According to The Hindu Business Line, Micron’s EVP of Global Operations, Manish Bhatia, said, “We will be expanding our engineering areas to have complete end-product development capabilities over time.”

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Micron invests in advanced DRAM technology

In the DRAM (dynamic random access memory) space, Micron is investing in smaller node technology that increases memory density and reduces cost and power consumption. In August, it began mass production of the industry’s first 1z nm (nanometer) 16GB (gigabyte) DDR4 (double data rate) products. Its DRAM products comprise computing DRAM, mobile DRAM, and graphics DRAM.

Micron claims that the 1z nm DRAM products will be 40% more power-efficient than its 1Y nm predecessors. The 1z nm products will address the high-performance, low-power-consumption requirements of 5G devices and AI at the edge.

The verdict

Looking at Micron’s capital spending, it’s clear that the company would benefit the most when memory prices rise. The company expects to continue reducing its cost per bit and increasing its high-value NAND and DRAM solutions. This could help it mitigate the impact of falling memory prices and accelerate the impact of rising memory prices.

In our view, investors should consider buying Micron stock when it falls, as it has strong upside potential in a cyclical upturn.

Analysts have a bullish price target of $90 for Micron. This represents an upside of 80% from the current trading price of $50. However, the stock could fall if the fears of a US recession come true. We believe that it’s better to buy Micron when it falls below $45.

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