Micron: An Amazing Story Is Unfolding Before Our Eyes

| About: Micron Technology (MU)

Micron (NASDAQ:MU) is the world's third largest DRAM manufacturer and the industry's most prolific consolidator.

Here's what is going on:

Micron itself has wafer capacity of about 336,000 wafer starts per month, about evenly split between DRAM and NAND flash Memory. Micron is in the late stages of acquiring Elpida out of bankruptcy for a fraction of the replacement value of the assets. Elpida is a combination of NEC, Hitachi, and Mitsubishi DRAM operations; as such, the combined company has some very impressive capabilities, particularly in packaging. The monthly wafer start capacity of Elpida is about 200,000 wafers, thus more than doubling Micron's DRAM capacity. Elpida includes Rexchip of Taiwan; Rexchip was a Powerchip Technology operation prior to being purchased by Elpida. Powerchip was a Taiwanese DRAM manufacturer.

Inotera Memories (3474.TW) is a joint venture of Micron, 40% and Nanya memories, 26%, with the balance of the company publicly held. Both Inotera and Nanya are Taiwanese companies. Inotera is the former Qimondo AG, which was spun off of Infineon Technologies (OTCQX:IFNNY), which itself was spun off of Siemens, AG (SI). Micron and Nanya have been splitting the output of Inotera, thought to be about 120,000 wafer starts per month. That deal was modified this past January to Micron getting all of the output of Inotera effective immediately. Expect a Micron buyout of Nanya's shares in Inotera. The shares of Inotera have tripled in the past quarter, yes, the past 90 days.

Numonyx was a joint venture of Intel (NASDAQ:INTC), STMicroelectronics (NYSE:STM) and Francisco Partners. Micron bought Numonyx in February of 2010 in an all-stock deal for 138 million Micron shares. The Numonyx acquisition brought to Micron more NAND and NOR flash and an interesting little technology called PCM or Phase Change Memory. Apparently, Intel pushed for the deal.

Lastly, we have IM Flash Technologies. IMFT is a joint venture of Intel and Micron to build NAND flash memory. The JV built a 100,000 wafer start, $4 billion fab in Singapore using a lot of Intel technology and fab expertise. The IMFT JV was "modified" in February of 2012. The modification involved the sale of Intel's interest in two fabs back to Micron (yes, the new Singapore fab was one) for $600 million, with $300 million of that staying with Micron to be consumed as Intel buys NAND chips from Micron. The JV was expanded to include "Emerging Memory Technologies." Remember that PCM technology? So, now it includes virtually everything Micron manufactures. The price Micron paid Intel was a fraction of the value of the assets, and was perhaps a way to "insert" Intel money into Micron.

The reason that I have traced all of these strange names back to the more recognizable names that they came from, is to suggest that the patents that Micron now owns runs into the tens of thousands. These patents alone might be worth the price of all the acquisitions.

So, Micron has been busy sweeping up memory companies on the cheap from the U.S., Europe, Taiwan, and Japan. After the Elpida deal closes, there will be only three DRAM manufacturers in the world; Samsung, Micron, and Hynix in order of revenue.

The result of all this is that Micron will now have capacity of 536,000 300mm wafer starts per month, plus the 120,000 wafers per month from Inotera. That's a total of over 650,000 wafer starts per month or 7.8 million wafers per year. That is within 60,000 wafer per month of the enormous Samsung capacity.

I left the best for last; the spot price of DRAM has increased 82% since December 3, 2012. I have no clue why the DRAM spot price is up so much. Perhaps there is a memory shortage developing, or perhaps the industry feels that Micron will convert one of those DRAM fabs to NAND flash.

The breakeven revenue for a tested and packaged wafer of DRAM is about $2300. Micron (and everyone else in the DRAM business) has been selling for $2000 per wafer, in the most brutal memory market in history, thus losing about 15% on sales. An 82% price increase from $2000 would be $3640 or a $1340 profit per wafer times the 7.8 million wafers mentioned above. That would be over $28 billion revenue and over $10 billion in net before taxes, or about $10 per share, pre-tax.

How long will it take the spot price to be reflected in the contract and overall price? If the spot price increases were to stop today, and held at the current price, it would take a year for the average price to move up to the spot price. If the spot price tips over, the average price will never make it to the spot price. The beautiful thing is that you can watch the daily spot price on DRAMeXchange and catch a change in trend before the stock price would change direction.

There are too many moving parts here to predict a number for earnings when Micron announces later this month, but I expect it to be a surprise and maybe a huge surprise. In the guidance sheet for this quarter, Micron was projecting a double digit price decrease in DRAM for this quarter. Instead, it will be at least something of an increase. The guidance sheet also is projecting a double digit decrease in DRAM cost per bit.

This is too good a story to not be involved.

I'm buying cheap out of the money call options for July. We get two earnings announcements before expiration.

Disclosure: I am long INTC, MU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.