After the Chinese New Year holiday, DRAMeXchange continues to report higher prices for DRAM memory. As of February 22, 2013 the spot price for the 2Gb DRAM chip has increased over 70% from December 3, 2012. This increase is remarkable in its magnitude and the short time frame of the increase. The increase is entirely within Micron's (MU) 2nd fiscal quarter of 2013.
In the DRAM market, there is a spot price and a contract price, much as there is a spot price and a futures price for natural gas or any other commodity. The spot price is the average price paid for a specific volume of DRAM chips for delivery today. Contract pricing is a little different animal. A contract price can be as simple as a purchase order price for multiple deliveries over a several-month period. Another form of contract price might be a long-term supply agreement between a manufacturer and a large customer. These supply agreements have provisions for periodic renegotiation of volume and prices. Approximately 30% of a DRAM manufacturer's sales are done in the spot market. In the case of Micron, 40% of sales are DRAM, so one might expect that an average of the 70% price increase (35%) times 40% of the quarter sales ($800 million in DRAM) could be expected in the present quarter. That number would be $280 million increase in sales and gross margin, which would wipe out the loss of the first fiscal quarter.
Elpida, the Japanese memory manufacturer that is being acquired by Micron, is 100% DRAM and is another $800 million in quarterly sales (click on the PDF version and go to page 72-73.) If the 35% were applied to this business, the result would be about $140 million net profit or about $.14/ Micron share. If the acquisition is completed by the time of the Micron earnings report in March, Elpida's earnings would be reported as Micron earnings. Guidance for the combined Micron/Elpida 3rd quarter would reflect the impact of DRAM's continued price appreciation toward the 70% higher spot price. With a Street estimate of a $.20 loss for Micron for the 2nd quarter, a $.14 per share profit should constitute a significant surprise.
With the inclusion of Elpida, Micron becomes second only to Samsung (SSNLF.PK) in the DRAM business. After the completed acquisition, the number of worldwide DRAM manufacturers will drop to three: Samsung, Micron, and Hynix, in that order of sales revenue. In recent presentations, Micron has indicated that 2013 will see fewer DRAM wafers produced than in 2012. This little nugget virtually guarantees that DRAM prices will at least stay high and very likely continue even higher during 2013. With no anticipated new DRAM capacity being built or planned anywhere, high DRAM prices can be expected to be long term.
In a recent presentation for Goldman Sachs, Micron President Mark Adams said that (minute 11:40), "..we will have to get used to running a $16 billion operation rather than an $8 billion operation." The trailing 12-month sales for Micron + Elpida is about $11 billion. Apparently, Mark feels that the new Micron will have $5 billion of unexplained new revenue, probably through higher memory prices. The $5 billion, if primarily price increases, will drop unimpeded to the bottom line and erase the trailing 12 month Micron loss of $1 billion and replace it with a $4 billion profit, or $4/share.
Obviously, the above numbers are a great deal of speculation, but the higher memory pricing trend is in place and can be tracked daily through DRAMeXchange.
After the Elpida deal closes, Micron becomes a very large factor in the semiconductor business with a secular change in memory prices already underway. Investors can monitor the progress of this trend through DRAMeXchange and take appropriate action well in advance of any trend change. Micron is likely a multi-year earnings story that will end with earnings of dollars instead of dimes. The play should be shares juiced with call options prior to earnings events.
Disclosure: I am long MU.