According to two new reports, the prices of DRAM and NAND Flash memories are expected to rise significantly in 2017. MU's results for the last quarter were better than expected, and its guidance for the next quarter was higher than estimates. MU stock still has further room to go higher.

DRAM accounted for 60% of Micron's total revenue in the company's fourth quarter of fiscal 2016, and NAND flash memory represented 31% of the company's revenue in the same period. According to two new reports by DRAMeXchange, the prices of DRAM and NAND Flash memories are expected to rise significantly in 2017, which will benefit Micron, driving its share even higher.

In a report on December 14, DRAMeXchange said that the DRAM market would see prices rising through 2017 due to slower growth in bit supply which is expected to grow less than 20%. Also, Micron, in its last earnings release, said that it expects higher bit demand growth than bit supply growth in 2017. 

In the report, DRAMeXchange explained:

"The global DRAM market has been on a roller coaster ride during 2016. Prices were on a steep slide in the year’s first half due to weak demand. However, the pickup in notebook shipments and the strong sales of Chinese branded smartphones since the start of the third quarter have not only reversed the price downtrend but also caused average selling prices of DRAM to make big jumps."

In another report from December 12, the research company said that it expects the prices of SSDs and EMMCs to increase by more than 10% in the first quarter of 2017 compared to the prior quarter, due to a shortage of NAND Flash memories. According to DRAMeXchange, in the fourth quarter of 2016, shortage of NAND Flash has reached the most severe phase of the year. The shortage in the last few months was driven by growing SSD demand and strong smartphone shipments. Also, the increase in the average memory content of eMMCs and eMCPs contributed to the shortage. DRAMeXchange clarified:

"Prices of various NAND Flash products are now at their highest for this year as the market anticipates the undersupply situation to persist well into the first quarter of 2017. Between this year’s fourth quarter and next year’s first quarter, contract prices of enterprise- and client SSDs are expected to rise by over 10%, while mobile products such as eMMC and UFS will register even larger contract price increases."

As I see it, rising prices of its products could increase micron revenue and profits and drive its stock higher even though it is already up 62% year to date, and up 220% since the beginning of 2013.

First Quarter Results

On December 21, after market close, Micron reported its first quarter fiscal 2017 financial results, which were better than expected. What's more, its guidance for the second fiscal quarter was significantly higher than analysts' average estimate. As a result, Micron's shares surged 9.9% in after-hours trading. Micron's adjusted earnings-per-share of $0.32 beat market expectations by a margin of $0.04 (14.3%), and the midpoint of its guidance of $0.17 by a significant margin of 88%. Sales for the quarter of $3.97 billion were up 18.5% year over year, slightly below Wall Street's estimates of $3.98 billion. The company beat earnings-per-share estimates in all its last six quarters, as shown in the table below.

For the second fiscal 2017 quarter, the company expects revenue of $4.35 billion to $4.70 billion, and non-GAAP earnings per share of $0.58 to $0.68. That is much better than the market expectations for revenue of $3.91 billion and adjusted earnings per share of $0.39. In the report, CEO Durcan said:

"Positive market momentum, driven by favorable demand trends and limited industry supply, produced solid results for our first quarter. We continue to make significant progress on our key technology and product initiatives, and we are pleased to have closed the Inotera acquisition on December 6, 2016, which we expect to further improve Micron’s strategic position and financial results."

According to Micron, the increase in the first quarter sales of 23% compared to its prior quarter was mainly due to an 18% increase in DRAM sales volume, and 26% increase in NAND sales volume, and due to a 5% increase in DRAM average selling price. In my view, the increase in Micron's gross margin in the recent quarter is quite impressive. The company's gross margin in the first quarter was at 25.5% compared to gross margin of 18% in the previous quarter. Reductions in manufacturing cost and increases in the average selling prices of DRAM contributed to the significant improvement of Micron's gross margin.

Conclusion

The two new reports indicate the prices of DRAM and NAND Flash memories are expected to rise significantly in 2017. In fact, even in its Q1 FY2017 earnings report, the company achieved a 5% increase in its DRAM average selling price. Micron's results for the last quarter were better than expected, and its guidance for the second fiscal quarter was significantly higher than analysts' average estimate. All these factors bring me to the conclusion that MU's stock still has further room to go higher.