Seligman Tech. Fund Team
For all the Barron’s 2018 Roundtable articles and notes click here.
Micron Technology (MU) $43.22 ($45.80 when published).
- The company significantly exceeded expectations. It is growing revenue by more than 50% a year. In fact, over the past couple of years, revenue has grown by more than 100%.
- And Micron’s profit margins have expanded significantly. Operating margins are now in the high-40% area.
- Margins are up because the cost to add new leading edge capacity has gotten so high that people aren’t adding new capacity as easily as in the past.
- There are three main players in DRAM: Micron, Samsung Electronics [005930.Korea], and SK Hynix [000660.Korea].
- If you think back to 20-odd years ago, the DRAM industry was all about PCs—new operating systems and new Intel processors. Now, PC DRAM is only about 20% of demand. The demand drivers are much more diverse. Mobile phones are 20%. Servers and data centers are probably 25% to 30%. Then there’s TVs and consumer electronics; it is getting really pervasive. Even automobiles have meaningful memory content.
- The demand from cloud data centers is inelastic because people with high-margin businesses like Google or Facebook [FB] don’t really quibble about the cost of memory. It’s not like Dell Computer 25 years ago; it would have killed to save 10 cents on a DRAM module.
- Micron is earning about $11 to $12 a share per year. The stock is about $45, which means people don’t think the good times are going to last.
- Not sure whether the current degree of profitability is sustainable, but we aren’t going to get down to a cyclical low with the companies losing money again.
- The balance sheet has been cleaned up. Micron generated $1.7 billion in free cash flow in the latest quarter. The annualized free cash flow is about $7.5 billion to $8 billion. The enterprise value is about $53 billion.
- There is a little more delevering to come. They’ll probably pay down another $2 billion or so of debt and then announce a meaningful share repurchase and capital return later in 2018.
Western Digital (WDC) $86.94 ($82.69 when published). Worth $120
- The company is half disk drive and half flash memory (acquired Sandisk)
- Dispute with Toshiba over. Extended the terms of the joint venture out to 2029,
- The company reiterated that it would earn more than $13 a share in the June 2018 fiscal year. The stock is around $80 a share. It is trading for six times earnings.
- Western Digital has a lot of debt on the balance sheet, but the company generates a prodigious amount of free cash flow per year—north of $3 billion a year.
- They have some high-cost debt, and will significantly delever the balance sheet in the next couple of years. They even have some debt that has 10% coupon rates on it that’s callable in April 2019. That will get called.
- The stock could go to $120. It is amazing to me that Seagate trades at a premium to Western Digital, given that Seagate is pretty much a pure magnetic disk-drive company.
- Inevitably, over time, magnetic disk drives are going away. At least with Western Digital, they have future-proofed the company to some degree by having flash memory as well as magnetic storage.
Marvell Technology Group (MRVL) $23.56 ($23.00 when published). Worth $30 to $40.
- Chip company. Makes disk-drive controllers for both magnetic disk drives and solid state drives.
- Had a management change a year and a half ago.
- In just two years Marvell’s gross margin has gone from 53% to 61%. The R&D spending that had been 36% to 40% of revenue is now 30%. And the operating profit margins, which had gotten as low as single digits, are now back up in the high-20% area.
- It has been a pretty solid turnaround. They’ve divested some unprofitable businesses and executed well.
- Both magnetic disk drives and solid state drives are a high-margin business—maybe as high as 70% gross margins. That’s about 55% of the company’s revenues.
- They also have a connectivity business, making Wi-Fi, Bluetooth-type products, mostly for game controllers. Microsoft Xbox is their marquee customer.
- Then they have a networking chip business that has lost share for the past decade to Broadcom [AVGO]. It recently has been doing better but had been sinking for a long time.
- It is buying Cavium [CAVM]. Cavium has been one of the best network processor companies in Silicon Valley. It has processors for wireless infrastructure equipment, security firewall appliances, and enhanced security of data centers.
- Cavium has a fast-growing ARM microprocessor family called Thunder X that has gained traction at a few cloud customers.
- The company has ethernet switch chips, and a year and a half ago, it bought QLogic, which gave it ethernet and fiber channel adapters. That will be synergistic with Marvell’s storage-related business.
- Has $1.7 billion or $1.8 billion of cash, and is paying about $5 billion for Cavium—half cash and half stock. It ended up taking on debt, but it is manageable.
- Marvell has excess real estate, so it can move Cavium’s employees to its campus and cut costs.
- While Marvell’s networking business has been steadily losing share, Cavium’s networking business is world class. By putting the two companies together, you should get a significant amount of R&D savings
- The deal should close around midyear. Earnings per share for calendar 2019 could be in the neighborhood of $2. The stock should trade for between 15 and 20 times earnings, so that puts the price of Marvel at $30 to $40 a share a year or so from now.
Oracle (ORCL) $50.98 ($48.47 when published).
- The company is doing well in its core database business.
- The company has a $190 billion enterprise value. Oracle is generating about $15 billion a year in free cash flow.
- It is a beneficiary of tax reform, and will see a 30- or 40-cent increase in earnings per share from tax reform. The company could earn around $3.63 a share in calendar 2019.
- The company has a lot of cash offshore. Share-repurchase activity could go from $10 billion a year to $13 billion-$14 billion. With the valuation modest, revenue growing by mid-single digits over time, and a weaker dollar helping, you could see a revaluation higher.
- Oracle trades at a lower free-cash-flow multiple than IBM. And IBM is a sinking ship in comparison to Oracle.
Snap (SNAP) $14.55 ($14.50 when published)
- The stock is below the IPO [initial public offering] price, but could sink further.
- Advertiser feedback isn’t all that encouraging. A lot of advertisers have tried using Snap and have found it a poor return on investment.
- The demographic is limited, so potential advertisers can’t advertise high-ticket items like cars, mortgages, or real estate. Even liquor is off-limits.
- The product is faddish. There has been lots of executive churn.
- They’ve lost significant share from Facebook’s Instagram Stories.
- The financials are dreadful. The company has an enterprise value of about $15 billion on projected revenues of about $1.1 billion, and they are burning $700 million to $800 million a year of cash.
- There is a large lockup agreement expiring on March 2 [certain insiders will be able to sell shares after that], the one-year anniversary of the IPO.
Intrexon (XON) $13.70 ($13.15 when published)
- It operates similarly to a biotech holding company; it is a rollup of struggling biotech companies and assets.
- Intrexon has ownership stakes in other small, struggling public companies, typically via another firm run by the CEO.
- A big chunk of revenue—the market cap is $1.7 billion, annual revenue is $200 million—comes from cattle-breeding services. This is a strange company.
- People get excited. The CEO made an announcement a number of years ago about licensing something from the M.D. Anderson Cancer Center, and we have seen nothing ever come of it.
Article by Brian Langis