Analyst's Notes. Argus Recommendations

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1 Report created Jan 16, 2018 Page 1 OF 6 Boise, Idaho-based Micron is the largest U.S. memory company and a leading global supplier of DRAM, NOR and NAND memory. The company provides memory solutions for computing, communications, consumer, and industrial applications, and serves both wireless and embedded applications. In July 2013, Micron completed its acquisition of Elpida and the Rexchip assets, boosting revenue from $9.1 billion in FY13 to $16.2 billion in FY15. Revenue surged to $20.3 billion for FY17 from $12.4 billion for FY16, indicative of Micron's price sensitivity. Analyst's Notes Analysis by Jim Kelleher, CFA, January 12, 2018 ARGUS RATING: BUY Limited effect from reducing INTC relationship Micron plans to exit its memory partnership with Intel and work independently on future generations of 3D NAND. The two companies will not cease all relationships. Both will continue to support development of 3D XPoint products. Contribution from IMFT represents less than 5% of revenue. Lost R&D contribution from Intel will be offset by Micron's ability to sell for a profit production that was formerly provided to Intel at cost. MU shares have backed down from peak prices on concerns about memory pricing; we believe supply and demand should be in balance this year, supporting NAND prices near current levels. INVESTMENT THESIS BUY-rated Micron Technology Inc. (NGS: MU) and BUY-rated Intel (NGS: INTC) have reported that they will cease collaborative development efforts and work independently on future generations of 3D NAND. The two firms, who have worked within the Intel-Micron Flash Technologies (IMFT) venture since 2005, will stop future development together after introducing their third generation of 3D NAND late in 2018 or early in The venture is currently ramping products based on second-generation, 64 layer 3D NAND technology. We expect third-generation 3D NAND to be 96-layer. The two companies will not cease all relationships. Both will continue to support development of 3D XPoint products at the IMFT fab in Lehi, Utah. Excluding 3D XPoint, the companies may be ending IMFT because they are seeking to address different markets. Intel has signaled that it is primarily focused on next-generation data center; in this environment, die size is not a preeminent concern. Micron, in our view, is going after the mobile and client (PC) markets, where smaller die sizes are less power-hungry. The two may also take different technology paths from the current Data Pricing reflects previous trading week's closing price. 200-Day Moving Average Price ($) Rating EPS ($) Quarterly Target Price: $ Week High: $ Week Low: $40.77 Closed at $45.80 on 1/5 Annual ( Estimate) 9.24 ( Estimate) Revenue ($ in Bil.) Quarterly Annual ( Estimate) 28.9 ( Estimate) FY ends Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Aug BUY HOLD SELL Argus Recommendations Twelve Month Rating SELL HOLD BUY Five Year Rating SELL HOLD BUY Rating Weight Under Over Weight Weight Argus assigns a 12-month BUY, HOLD, or SELL rating to each stock under coverage. BUY-rated stocks are expected to outperform the market (the benchmark S&P 500 Index) on a risk-adjusted basis over the next year. HOLD-rated stocks are expected to perform in line with the market. SELL-rated stocks are expected to underperform the market on a risk-adjusted basis. The distribution of ratings across Argus' entire company universe is: 50% Buy, 44% Hold, 6% Sell. Key Statistics Key Statistics pricing data reflects previous trading day's closing price. Other applicable data are trailing 12-months unless otherwise specified Overview Price $42.81 Target Price $ Week Price Range $21.49 to $49.89 Shares Outstanding 1.16 Billion Dividend $0.00 Overview Technology Rating OVER WEIGHT Total % of S&P 500 Cap % Financial Strength Financial Strength Rating MEDIUM-HIGH Debt/Capital Ratio 36.4% Return on Equity 50.4% Net Margin 32.8% Payout Ratio -- Current Ratio 2.34 Revenue $23.16 Billion After-Tax Income $7.59 Billion Valuation Current FY P/E 4.36 Prior FY P/E 8.81 Price/Sales 2.14 Price/Book 2.20 Book Value/Share $19.47 Capitalization $49.50 Billion Forecasted Growth 1 Year EPS Growth Forecast % 5 Year EPS Growth Forecast 10.00% 1 Year Dividend Growth Forecast N/A Risk Beta 1.23 Institutional Ownership 81.57%

2 Report created Jan 16, 2018 Page 2 OF 6 architecture. Contribution from IMFT is not immaterial to Micron, but it represents less than 5% of revenue. Going forward, Micron will lose some R&D support from Intel. At the same time, the venture sold parts to Intel at cost; those products can now be sold on a merchant basis, generating normal margins. We believe the net effect will be invisible on the income statement. MU shares have backed down from peak prices on concerns about memory pricing; we believe supply and demand should be in balance this year, supporting NAND prices near current levels. On the heels of a huge top-line beat for 1Q18, Micron guided for 2Q18 sales and adjusted EPS well ahead of pre-reporting expectations. Micron has transitioned from a deep-value idea in Argus technology coverage to a growth story. Given ongoing memory-industry volatility and sensitivity to pricing, we continue to recommend MU for investors aware of the risks of investing in memory technology, where volatile pricing can drive big stock swings. We reiterate our BUY rating and 12-month target price of $55 for MU. RECENT DEVELOPMENTS MU is up 4% year-to-date in 2018, compared with a 6% gain for the Argus Semiconductor group. MU shares rose 88% in 2016, compare with a 31% gain for Argus-covered semiconductor peers. On 1/8/18, Micron and Intel jointly announced an update to their successful NAND memory joint development partnership known as Intel-Micron Flash Technologies (IMFT). The two companies have agreed to work independently on future generations of 3D NAND. The two companies have pledged to continue developing one of the more well-known collaborations from the JV, called 3D XPoint. Work will continue at the IMFT joint venture fab in Lehi, Utah, which is entirely focused on 3D XPoint production. Intel and Micron have agreed to complete development of their third generation of 3D NAND technology, which will be delivered sometime around year-end 2018 extending into early The IMFT venture is currently ramping products based on second-generation, 64 layer 3D NAND technology. We expect third-generation 3D NAND to be 96-layer. Beyond this third-generation release, 'both companies will develop 3D NAND independently in order to better optimize the technology and products for their individual business needs.' We believe the key reason for dissolving this venture, or least all but the 3D XPoint portion, is that the two companies are seeking to prioritize different markets. Intel has made clear that it is focused on next generation data center, which is higher margined and faster-growing than its client compute group (PC) business. Intel is determined to bring major computing and memory firepower to this market amid mounting threats from GPUs and from ARM-based server technology. We believe Intel is less focused on products with tiny die sizes to serve this market, where power consumption is important but not Growth & Valuation Analysis GROWTH ANALYSIS ($ in Millions, except per share data) Revenue 9,073 16,358 16,192 12,399 20,322 COGS 7,226 10,921 10,977 9,894 11,886 Gross Profit 1,847 5,437 5,215 2,505 8,436 SG&A R&D 931 1,371 1,540 1,617 1,824 Operating Income 236 3,087 2, ,868 Interest Expense Pretax Income 1,285 2,733 2, ,196 Income Taxes Tax Rate (%) Net Income 1,190 3,045 2, ,089 Diluted Shares Outstanding 1,057 1,198 1,170 1,036 1,154 EPS Dividend GROWTH RATES (%) Revenue Operating Income 1, ,392.9 Net Income EPS Dividend Sustainable Growth Rate VALUATION ANALYSIS Price: High $23.67 $36.59 $35.52 $23.64 $49.89 Price: Low $6.45 $20.64 $13.50 $9.31 $21.49 Price/Sales: High-Low P/E: High-Low Price/Cash Flow: High-Low Financial & Risk Analysis FINANCIAL STRENGTH Cash ($ in Millions) 2,287 4,140 5,109 Working Capital ($ in Millions) 4,691 4,660 7,123 Current Ratio LT Debt/Equity Ratio (%) Total Debt/Equity Ratio (%) RATIOS (%) Gross Profit Margin Operating Margin Net Margin Return On Assets Return On Equity RISK ANALYSIS Cash Cycle (days) Cash Flow/Cap Ex Oper. Income/Int. Exp. (ratio) Payout Ratio The data contained on this page of this report has been provided by Morningstar, Inc. ( 2018 Morningstar, Inc. All Rights Reserved). This data (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. This data is set forth herein for historical reference only and is not necessarily used in Argus analysis of the stock set forth on this page of this report or any other stock or other security. All earnings figures are in GAAP.

3 Report created Jan 16, 2018 Page 3 OF 6 top-of-list. Intel uses IMFT production in its SSDs, which are addressed solely for the enterprise market. Micron is focused on developing memory products for mobile and mobile PC applications, employing both mobile DRAM and NAND. In these markets, where power-thriftiness is top priority, ever-smaller die sizes are required. In the NAND market, Micron supplies both its own products, such as enterprise and client SSDs, as well as selling NAND on a merchant basis to other component companies and OEMs. These customers too are prioritizing power-efficient NAND at ever-smaller die sizes. Beyond different market-focus approaches, the potential for technological divergence may push the two companies down separate paths. As discussed in the AnandTech blog, IMFT uses floating gate cell architecture in its 3D NAND products and will continue to do so in the third-generation, 96-layer product due later this year or in Samsung and other NAND producers use charge trap flash technology. Though similar in many ways, charge trap flash uses silicon nitride film to store electrons rather than doped polycrystalline silicon used in floating gate cell Flash. Any such change in technology approach would not be visible for several years. For Micron, the contribution from IMFT is not immaterial but it represents less than 5% of revenue. In fiscal 2017, under the category of memory technologies as a percentage of revenue, DRAM was 64%; trade NAND was 31%; NOR was 2%; and Other was 4%. The Other category includes NAND sold at cost to Intel. Once Intel departs from the venture, that company will no longer contribute to R&D costs, except insofar as they are related to 3D XPoint. As an offset, production formerly sent to Intel at cost can now be sold in the merchant market with normal profit margin attached. We believe the net effect will be invisible on the income statement, given Micron's size, the relatively small contribution from IMFT, and the offsetting factors of lost R&D contribution vs. NAND sold at cost to Intel. The MU shares dipped from $45.50 to about $43 on news of the JV's demise. That dip is part of a larger trend. MU peaked just under $50 in November 2017 and has worked somewhat lower since then. We believe the downward drag on the stock price is related to concerns about NAND pricing, which spiked in According to the website Storage Newsletter, NAND prices rose by more than 20% in the key Chinese market in 1H17 and sustained additional strength into year-end. Limited NAND supply growth in 2017, along with strengthening demand, contributed to pricing growth. Micron believes that NAND bit supply will increase by 40%-50% for 2018, more than in However, Micron also believes such a level of increased production can be absorbed by rising demand. A price decline is inevitable at some point; but if managed properly, according to Micron, a NAND price drop can help markets expand. In particular, a substantial portion of the PC market still uses hard disk drives (HHDs). A lower price point for NAND will make SSDs more price-competitive with HDDs, which Peer & Industry Analysis The graphics in this section are designed to allow investors to compare MU versus its industry peers, the broader sector, and the market as a whole, as defined by the Argus Universe of Coverage. The scatterplot shows how MU stacks up versus its peers on two key characteristics: long-term growth and value. In general, companies in the lower left-hand corner are more value-oriented, while those in the upper right-hand corner are more growth-oriented. The table builds on the scatterplot by displaying more financial information. The bar charts on the right take the analysis two steps further, by broadening the comparison groups into the sector level and the market as a whole. This tool is designed to help investors understand how MU might fit into or modify a diversified portfolio. P/E Value STX 5-yr Growth Rate(%) NTAP WDC MU Growth 5-yr Net 1-yr EPS Cap Growth Current Margin Growth Argus Ticker Company ($ in Millions) Rate (%) FY P/E (%) (%) Rating MU Micron Technology Inc 49, BUY WDC Western Digital Corp 24, BUY NTAP NetApp Inc 16, BUY STX Seagate Technology PLC 14, HOLD Peer Average 26, P/E Price/Sales Price/Book PEG 5 Year Growth Debt/Capital

4 Report created Jan 16, 2018 Page 4 OF 6 would aid in the transition to all PCs adopting SSDs for new builds and for after-market upgrades. The company's strong fiscal 2Q18 guidance, issued late in December 2017, signals confidence about memory demand and pricing at least in the intermediate-term. In summary, MU shares have backed down from peak prices on concerns about memory pricing; we believe NAND supply and demand should be in balance this year, supporting NAND prices near current levels. Given ongoing memory-industry volatility and sensitivity to pricing, we continue to recommend MU for investors aware of the risks of investing in memory technology, where volatile pricing can drive big stock swings. EARNINGS & GROWTH ANALYSIS For fiscal 1Q18 (ended 11/30/17), Micron reported revenue of $6.80 billion, which was up 73% year-over-year and 10% sequentially; well above the high end of management's $6.1-$6.4 billion guidance range; and well above the $6.44 billion consensus forecast, which was also above the top of management's September guidance. On higher volume, Micron achieved a substantial jump in gross margins, which (given current memory pricing) appear sustainable at least in the near term. GAAP gross margin reached 55.1% for 1Q18, versus 50.7% for 4Q17 and 25.5% a year earlier. Non-GAAP operating margin was 46.4% for 1Q18, versus 41.4% for 4Q17 and 9.6% a year earlier. Non-GAAP earnings came to $2.45 per diluted share for 1Q18, compared with non-gaap profit of $2.02 in sequentially adjacent 4Q17 and non-gaap profit of $0.32 per share in 1Q17. Fiscal 1Q18 non-gaap EPS handily exceeded management's guidance of $2.09-$2.23 and the $2.20 consensus estimate. For the August 2017 fiscal year, Micron generated revenue of $20.32 billion, up 64% from $12.4 billion in FY16 and above the prior high of $16.2 billion in FY15. Micron generated non-gaap earnings of $4.86 per diluted share in FY17, compared with $0.06 per diluted share in FY16. For fiscal 2Q18, Micron guided for revenue of $6.8-$7.2 billion, which at the $7.0 billion midpoint would be up over 50% annually and in low-single-digits sequentially. Management also guided for non-gaap gross margin in the 54%-58% range; and non-gaap operating income of $3.25-$3.75 billion. Given efforts undertaken to strength the balance sheet, including a $1.4 billion equity offering in 1Q18 whose proceeds were used to pay down debt, Micron expects non-gaap interest expense to be reduced to the $25-$30 million per-quarter range, from about $100 million per quarter in Based on those factors, non-gaap EPS for 2Q18 was forecast in a range of $2.51-$2.65. Prior to Micron's 1Q18 report, analysts had been modeling revenue of $6.24 billion and non-gaap EPS of $2.04 for 2Q18. Our fiscal 2018 non-gaap forecast for Micron is $9.81 per diluted share. We are reaffirming our non-gaap EPS forecast for FY19 of $9.24 per diluted share. While our forecast implies FY19 EPS below that for FY18, our revised FY19 non-gaap EPS estimate would still be more than double the $4.86 earned in FY17. Our GAAP estimates are $9.11 per diluted share for FY18 and $8.70 per diluted share for FY19. Our long-term annualized EPS growth forecast for Micron is 10%. FINANCIAL STRENGTH & DIVIDEND Our financial strength ranking on Micron is Medium-High, raised from Medium. Our more favorable financial strength ranking is based on Micron's success in paying down debt related to acquiring Inotera, Elpida and Rexchip. During 1Q18, Micron executed a $1.4 billion equity offering, with proceeds used to reduce debt. Cash & investments were $6.17 billion at 1Q18. Cash & investments were $5.43 billion at the end of FY17, $4.40 billion at the end of FY16, up from $4.0 billion at midyear. Cash was $3.52 billion at the end of FY15; including long-term investments, cash was $5.63 billion. Cash & equivalents were $4.53 billion at the end of FY14; $3.10 billion at the end of FY13, and $2.56 billion at the end of FY12. Debt was $9.05 billion at 1Q18. Debt was $11.13 billion at the end of FY17, $9.90 billion at the end of FY16, up from $7.62 billion at the end of 2Q16. Debt was $7.34 billion at the end of FY15, $6.6 billion at the end of FY14, $6.04 billion at the end of FY13, and $3.23 billion at the end of FY12. As a result of strong cash flows and the equity offering, net debt was reduced to $2.87 billion at 1Q18 from $5.71 billion at the end of FY17. Cash flow from operations was $8.15 billion in FY17, compared to $3.17 billion in FY16, $5.21 billion in FY15 and $5.70 billion in FY14. Cash flow from operations was $1.81 billion in FY13, compared to $2.48 billion in FY12 and $3.10 billion in FY11. Micron does not pay a dividend, and we do not expect it to do so in FY18 or FY19. The company has repurchased stock opportunistically. MANAGEMENT & RISKS In April 2017, Micron appointed former SanDisk CEO and co-founder Sanjay Mehrotra as CEO. Ernie Maddock became CFO in May In June, Micron announced Sumit Sadana, a former SanDisk executive, as EVP and Chief Business Officer. All four business units now report to EVP Sadana, who will also be responsible for driving corporate strategy and business development. The exit from the IMFT JV with Intel is expected to have a minimal effect on sales and profits for Micron. The effects of this break-up will not be felt for over a year. Additionally, the end of the JV may give Micron more freedom to pursue adjacent technologies. Given CEO Mehrotra's long industry experience, we believe the CEO transition represents limited risk. Other risk-mitigators include positive industry fundamentals and exemplary company execution at present. Additional risks include memory industry pricing and ongoing weakness in PC demand. While we believe that PCs are in secular decline we also believe that PC stability at a lower level will help stabilize DRAM pricing. Additionally, PC percentage of DRAM bits should continue to shrink. NAND pricing should be supported by mobile device demand and growth in cloud-based data centers. There are also risks related to the acquisition of major assets out of bankruptcy. The company has inherited risks related to existing customer relationships, as Elpida's Japanese customers could choose to patronize other Japanese DRAM suppliers. In acquiring Elpida, Micron inherited a coveted and lucrative relationship with Apple. Micron has done a good job integrating these assets and combination risk has faded.

5 Report created Jan 16, 2018 Page 5 OF 6 COMPANY DESCRIPTION Boise, Idaho-based Micron is the largest U.S. memory company and a leading global supplier of DRAM, NOR and NAND memory. The company provides memory solutions for computing, communications, consumer, and industrial applications, and serves both wireless and embedded applications. In July 2013, Micron completed its acquisition of Elpida and the Rexchip assets, boosting revenue from $9.1 billion in FY13 to $16.2 billion in FY15. Revenue surged to $20.3 billion for FY17 from $12.4 billion for FY16, indicative of Micron's price sensitivity. VALUATION Micron has experienced several years of operating losses, and as such is challenging to value on traditional measures such as absolute and relative P/E. With EPS now back in growth mode, however, the stock is attractive based on historical multiple comparisons. The shares trade at 4.4-times our non-gaap FY18 EPS forecast and at 4.6-times our FY19 projection; the two-year forward P/E is 4.5-times, below the historical average of 7.3 (which excludes fractionally profitable FY16). Our comparable historical valuation points to a value for MU in the mid-$70s, in a rising trend. Given rising free cash flow expectations for Micron, and our more forward-looking discounted free cash flow methodology, we calculate a DFCF value for MU above $150, in a rising trend. Our blended valuation model for Micron renders a value north of $130, well above current levels. Appreciation to our 12-month target price of $55 implies a risk-adjusted return in the mid-teens, which exceeds our forecast for the broad market. Given ongoing memory-industry volatility and sensitivity to pricing, we continue to recommend MU for investors aware of the risks of investing in this space. On January 12, BUY-rated MU closed at $42.81, down $0.01.

6 METHODOLOGY & DISCLAIMERS Report created Jan 16, 2018 Page 6 OF 6 About Argus Argus Research, founded by Economist Harold Dorsey in 1934, has built a top-down, fundamental system that is used by Argus analysts. This six-point system includes Industry Analysis, Growth Analysis, Financial Strength Analysis, Management Assessment, Risk Analysis and Valuation Analysis. Utilizing forecasts from Argus Economist, the Industry Analysis identifies industries expected to perform well over the next one-to-two years. The Growth Analysis generates proprietary estimates for companies under coverage. In the Financial Strength Analysis, analysts study ratios to understand profitability, liquidity and capital structure. During the Management Assessment, analysts meet with and familiarize themselves with the processes of corporate management teams. Quantitative trends and qualitative threats are assessed under the Risk Analysis. And finally, Argus Valuation Analysis model integrates a historical ratio matrix, discounted cash flow modeling, and peer comparison. THE ARGUS RESEARCH RATING SYSTEM Argus uses three ratings for stocks: BUY, HOLD, and SELL. Stocks are rated relative to a benchmark, the S&P 500. A BUY-rated stock is expected to outperform the S&P 500 on a risk-adjusted basis over a 12-month period. To make this determination, Argus Analysts set target prices, use beta as the measure of risk, and compare expected risk-adjusted stock returns to the S&P 500 forecasts set by the Argus Strategist. A HOLD-rated stock is expected to perform in line with the S&P 500. A SELL-rated stock is expected to underperform the S&P 500. Argus Research Disclaimer Argus Research is an independent investment research provider and is not a member of the FINRA or the SIPC. Argus Research is not a registered broker dealer and does not have investment banking operations. The Argus trademark, service mark and logo are the intellectual property of Argus Group Inc. The information contained in this research report is produced and copyrighted by Argus, and any unauthorized use, duplication, redistribution or disclosure is prohibited by law and can result in prosecution. The content of this report may be derived from Argus research reports, notes, or analyses. The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but Argus makes no representation as to their timeliness, accuracy or completeness or for their fitness for any particular purpose. This report is not an offer to sell or a solicitation of an offer to buy any security. The information and material presented in this report are for general information only and do not specifically address individual investment objectives, financial situations or the particular needs of any specific person who may receive this report. Investing in any security or investment strategies discussed may not be suitable for you and it is recommended that you consult an independent investment advisor. Nothing in this report constitutes individual investment, legal or tax advice. Argus may issue or may have issued other reports that are inconsistent with or may reach different conclusions than those represented in this report, and all opinions are reflective of judgments made on the original date of publication. Argus is under no obligation to ensure that other reports are brought to the attention of any recipient of this report. Argus shall accept no liability for any loss arising from the use of this report, nor shall Argus treat all recipients of this report as customers simply by virtue of their receipt of this material. Investments involve risk and an investor may incur either profits or losses. Past performance should not be taken as an indication or guarantee of future performance. Argus has provided independent research since Argus officers, employees, agents and/or affiliates may have positions in stocks discussed in this report. No Argus officers, employees, agents and/or affiliates may serve as officers or directors of covered companies, or may own more than one percent of a covered company s stock. Morningstar Disclaimer 2018 Morningstar, Inc. All Rights Reserved. Certain financial information included in this report: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.