The fact that the US chipmaker Micron Technology (NASDAQ:MU) is doing less business this year with its joint venture partner, tech giant Intel (NYSE:INTC), is the first of many takeaways Baird Equity Research analyst Tristan Gerra has gleaned from the company’s latest 10Q filing.
Indeed, sales to Intel under the umbrella of the Intel/Micron Flash Technology joint venture fell to US$114mln in the fiscal third quarter of this year and US$341mln in the fiscal year to date compared with US$123mln in the fiscal quarter of last year and US$375mln for the first nine months of the last fiscal year.
One reason for the slowdown is that the IMFT joint venture discontinued its production of NAND chips in the first fiscal quarter to focus on 3D XPoint memory production. Micron still expects to develop third-generation 3D NAND chips with Intel, starting next year.
Micron’s cash flow looks healthy
Another point from the 10Q which Baird’s Gerra highlights is Micron’s cash flow from operations in the fiscal third quarter was US$4.26bn – a dramatic improvement from the US$2.41bn reported in last year’s fiscal third quarter.
Free cash flow, meanwhile, also swung higher to US$1.83bn in the fiscal third quarter, up from US$1.14bn in the third quarter last year.
Another bright spot was that the company’s gross margin jumped 300 basis points from the previous quarter thanks to favorable pricing and the lower cost of manufacturing.
Gerra reiterated his Outperform rating on the stock and US$100 price target on "continued strong demand/ content increase trends and healthy supply, demand dynamics, a meaningful improvement in Micron’s fundamentals, and valuation.”
Micron, which is based in Boise, Idaho, is the second-largest supplier of memory globally, offering chips that include DRAM, NAND flash and NOR flash.
Micron still carries risks
On Gerra’s list of risks about Micron is the volatility in the average selling prices of its memory products, which sometimes sell for prices that fail to meet its production costs.
Traditional supply and demand dynamics push chip prices up or down. “When the average selling price per megabit falls faster than Micron’s production costs, margins are negatively impacted,” Gerra wrote.
Another concern is that memory chips are a cyclical business, with oversupply “often occurring for sustained periods of time.” In periods of oversupply, Micron’s balance sheet and cash flow deteriorate, according to Gerra.
A final worry is acquisitions, which Micron makes from time to time, as they can be large and difficult to integrate and also often require funding. “Acquisition integration represents a risk,” concluded Gerra.
Takeaways from Oppenheimer analyst Rick Schafer’s Daily Chip Clips
In other news, Micron plans to appeal a preliminary injunction handed down last week by a Chinese court that prevents its Chinese subsidiaries from manufacturing, selling or importing some DRAM modules and solid-state drives, according to Daily Chip Clips, a tech news bulletin put out today by Oppenheimer analyst Rick Schafer.
The ruling was issued last week by the Fuzhou Intermediate People’s Court in China’s Fujian province.
A second revelation from Schafer’s report is that the semiconductor industry has a shot next year at its first US$500bln year thanks to the soaring price of memory chips.
The trade battle between the US and China could pose a “dark spot on the horizon,” however, that might impede the growth of the sector, which is poised to see as much as a 15% upside this year, says Schafer.
A final news tidbit from Schafer is that China is likely to unseat South Korea as the largest market for semiconductor manufacturing equipment next year, according to the electronics trade association SEMI.
Indeed, global sales of semiconductor equipment are set to jump 10.8% to US$62.7bn this year and whiz past the historic high of US$56.6bn set last year, says SEMI.
Schafer’s report is based on articles in Digitimes and EE Times, two industry trade publications.
Micron shares closed 2.8% lower Wednesday at US$54.18.