Micron Technology (NASDAQ: MU) has been one of the best-performing semiconductor stocks in recent memory. Although markets have pulled back greatly from their pre-coronavirus highs, Micron stock appears to be on the road to recovery, and maybe then some.
Over the past two months, the Dow Jones industrial average, Nasdaq and S&P 500 have sold off and bounced back, but not to full strength. Many stock market analysts were calling for a V-shaped recovery at first, but with the way the markets are heading now, recovery is looking to be more L-shaped. However, Micron’s stock price is making the case for itself, with a steady incline since the mid-March lows.
Semiconductors generally have been thought of as a leading indicator for the broad markets. Could Micron’s push higher could be indicative of the broad markets’ recovery?
The steps that Micron has taken on the road to recovery are not uncommon, and in fact many companies have done the same. Naturally, these moves have focused on cutting costs and improving the balance sheet to weather this COVID-19 storm. However, there have been unexpected windfalls in the form of increased demand for solid state memory.
Cash Rules Everything
As part of its measures taken to improve its balance sheet and liquidity, Micron announced earlier this month that it would be raising $1.25 billion in capital via senior notes. The deal settled last week.
Under the terms, Micron sold $1.25 billion worth of senior notes due 2023. The notes will bear interest at a rate of 2.497% per year. That interest will be payable semiannually on April 24 and October 24 of each year, commencing on October 24, 2020. Citigroup, Credit Suisse and Morgan Stanley are acting as the joint book-running managers for the offering.
Micron intends to use the net proceeds to repay a portion of the outstanding borrowings under its existing revolving credit facility.
This is a sizable chunk of change for Micron, which only has a market cap of roughly $50 billion. The company ended its February quarter with around $7.1 billion in cash and cash equivalents, as well as $5.82 billion in total current liabilities.
Pandemic Sales Boost
This coronavirus pandemic has not been entirely bad for Micron shares. The stay-at-home regulations actually have boosted sales for chipmakers.
School closings have helped boost sales of personal computers and laptops as millions of students get set to close the 2019-2020 school year with online classes and maybe even virtual graduation ceremonies.
Separately, U.S. businesses told workers to work from home, and many have purchased computers to enable employees to continue to do so. All those PCs and laptops include at least DRAM or NAND memory chips (or both), and Micron earns nearly two-thirds of its annual revenues from DRAM chips and about a third from NAND chips.
Some quick background: DRAM (dynamic random access memory) chips are used in a number of ways in virtually every desktop PC, laptop and server. NAND flash memory is used in smaller devices, like thumb drives, cameras and smartphones, where its large storage capacity and ability to write and erase data quickly is a significant benefit. Solid state drives are also big consumers of NAND flash.
Short-Term Memory
The coronavirus pandemic has absolutely shifted how the world does business now. A majority of people are working from home, and with this move comes an increased demand for memory. As companies relocate employees’ workstations to their own homes, there are more computational needs arising that memory markets are directly dealing with.
The question posed to Micron is if this new work-from-home trend will put an end to the market glut in memory chips. This oversupply was a problem that plagued Micron and its competitors in 2019.
Currently, corporate data centers are also expected to buy more memory chips to meet demand for bandwidth from their customers, as well as their own employees. However, a supply shortage may be on the way as Samsung reported preliminary first-quarter results earlier this month, noting a sales improvement of 5% year over year in memory chips.
Although there is much uncertainty about what is to come and when the economy will fully reopen, Micron has a strong outlook, at least in the short term. In the long term, looking back, this pandemic may just be a distant memory.
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