Follow hedge-fund star into Micron

Micron specialises in dynamic random-access memory (DRAM) and reprogrammable NAND memory chips, both of which are used to store and transfer data. The group earned its stripes in the personal computing and mobile device markets, but it's now shifting its focus towards faster-growing and higher-margin applications such as servers, networks, cars and enterprise storage.

The group continues to benefit from soaring global demand for high-speed wireless connectivity, streaming video and fast, effective data collection and analysis. Those 'big data' trends are straining the capacities of businesses, handset manufacturers and mobile network operators, forcing them to shell out on more and better memory chips. Smartphone makers' need for high-performance, low-power chips, growing volumes of electronics in cars and the addition of computing and home entertainment functions to gaming consoles have also driven demand. The upshot has been rising demand for Micron's mobile, server, graphics and automotive offerings, which helped boost first-half revenue by 7.2 per cent while widening the group's gross margin from 32.9 per cent to 34.8 per cent.

Micron's new products are also fuelling demand. Enterprise sever and networking customers are clamouring for DDR-4, its latest DRAM solution. And Micron is gearing up to launch 3D NAND, a 'gum-stick' sized memory solution that saves space by stacking components, in the final quarter of this year. Needham analysts expect these higher-margin offerings, together with strong mobile and server demand and an improved DRAM supply deal with partner Inotera, to widen Micron's gross margin from about 35 per cent to 45 per cent by the end of 2016. It has already doubled its cash-profit margin in the past four years, although that partly reflects its landmark takeover of Elpida Memory and Rexchip Electronics in 2013.  

Those factors underpin bullish earnings forecasts. RBC Capital Markets expects robust sales growth to send pre-tax profit up 8 per cent this year, then by 29 per cent to $4.15bn in 2016. Yet Micron's shares trade at just eight times the brokers' consensus forecasts for EPS over the next 12 months, which is a deep discount to the sector average of 17.

A key concern for investors, which helps explain the discount, is negative DRAM pricing pressure in Micron's core PC market. However, management expects the launch of Windows 10 and the holiday season to boost second-half sales. Another concern may be reports that Samsung will manufacture at least half of the DRAM in Apple's upcoming iPhone 6S, displacing Micron. But there's a positive flip-side to this, which is that Apple has demanded steep discounts from Micron in the past, and if Samsung allocates more of its DRAM output to Apple, Micron may be able to steal share in markets such as data centres, PC components and Chinese smartphones. Moreover, broker JPMorgan thinks Apple may double its DRAM density to 2GB this year, benefiting both Samsung and Micron.