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Takeaway: Taking off the trade after a nice, post XMAS bounce

The bullish setup that got us off the bench at 1x book value was the prospect, based on our channel work, that by mid-year DRAM bits/unit would increase in smartphone and PC and soak up some of the excess capacity currently in the market. In that scenario, Micron won’t lose much money on an EPS basis this cycle.

No change to that view…but a couple of twists:

  1. The buyback constrains book value growth, or maybe offsets quarterly net income impact to book value from here
  2. The IMFT transaction may have twists and turns that are negative to book value. Consider that the acquired Fab has taken $6B of investment, is carried on the books at $2.5B, and is producing $175MM of revenue per quarter. The fab was part NAND part 3D XPT, but is now serving revenue only for 3D XPT, so it might make sense to revalue the fab (and thus book value) lower. While this would be an accounting-only change, the 1x book rule, or P/bk relative to ROE rule, remains in effect, and would make the next buying opportunity potentially in the ~$26 range versus our previous effort at $29.

The DRAM business will be +/- in the coming 12-months. The NAND business can grow over the next 18-24 months off a pretty terrible collapse in pricing. We can wait for later in the year for the latter to be a big enough positive forward catalyst to risk buying the stock.

Please call or e-mail with any questions.

Ami Joseph

Managing Director

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Yosef Vaitsblit

Analyst

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