This article by Barry Pasikov is excerpted from a letter of Hazelton Capital Partners.
Micron has been Hazelton Capital Partners’ best-performing stock year-to-date and has taken over as its top holding. The company has witnessed strength in both its DRAM and NAND segments, leading to an EPS (earnings per share) of $4.86 for 2017 and the market is expecting over $6.50 for 2018. Closing out the quarter just under $40/share, Micron is currently trading at a PE (price to earnings) of 8.2x and 6.2x for 2018 – a true indication that the market does not believe that the current DRAM and NAND average selling price is sustainable.
In the past, the digital memory and storage industry has been a victim of rapid technological change and competition amongst its members, preventing companies from achieving a meaningful return on their invested capital. Today, with 3 major players in DRAM and 5 in NAND, pricing is primarily driven by production capacity and not to achieve market share, as industry players have become more “rational.” Cyclicality will continue to play a role, but as demand for digital memory and storage expands from an increasingly connected data ecosystem, including the cloud, data storage, mobile devices and now the burgeoning IoT (internet of hings), it is expected that the duration of the cycle will be longer with a muted peak to trough pricing, leading to a stronger and more sustainable average selling price.
At the same time that the average selling price of both DRAM and NAND is forecasted to decline over the next year, industry players will be able to leverage recent production advancements to lower production costs, allowing for continued healthy margin.
Even with the significant rise in its share price, Hazelton Capital Partners still sees more upside opportunity.