Micron To Benefit From Memory Shortages, Part IV

| About: Micron Technology (MU)

Micron Technology Inc.'s (NASDAQ:MU) customers, geopolitics, Wall Street analysts and even competitors are beginning to indicate that memory shortages are happening. I feel they will continue and will benefit Micron.

Previous articles in this series attempted to tackle various aspects of computer memory shortage and how they might affect Micron:

  • "Micron to Benefit from Memory Shortages?" looked at historical "chip famines", and one company presently reeling from lack of steady supply.
  • "Micron to Benefit from Memory Shortages, Part II": focuses on a Wall St. research report, and touches on the fragility geopolitics or natural disasters can impose
  • "Micron to Benefit from Memory Shortages, Part III": tries to answer the question posed in a comment to the previous article on what happens to stock prices in a shortage.

This article updates what is happening in the markets, and dives into another research report.

Customers. Second and Third tier Asian manufacturers seem to already have been affected by chip shortages, in this article from April 5:

The growth in the demand for the Korean giant's [Samsung's] smartphones is causing supplies of eMCP/CI-MCP [embedded multi chip packages, combinations of DRAM and FLASH in one package] to tighten. Given the large number of Chinese branded smartphones that are known to rely on Mediatek's eMCP reference chips, the constraints to eMCP supply are expected to have a negative impact on various Chinese manufacturers' shipments.

The article concludes with this caution:

...if manufacturers like Samsung and SK Hynix do not successfully resolve the eMCP/CI-MCP shortage issue during April, and if other memory manufacturers are unable to fill in the gap, the eMCP/CI-MCP inventory of smartphone manufacturers are in danger of dropping below safety levels. This is likely to create a domino effect....

Geopolitics. My previous article looked at some of the effects of war, floods and other disruptions. It's not necessary for specific plants to be damaged; it's bad enough to have worries about supplies. As the old saying goes, "Buy on the sound of cannons. Sell on the sound of trumpets." Now there are articles expressing worries about supplies, like this one from April 10:

Taiwan is the world's leading semiconductor marker, while South Korea ranks third .... An armed conflict between the two Koreas would wreak havoc on supply channels in a matter of weeks, and it would also have a massive impact on Taiwanese companies.

"Taiwan's DRAM production capacity is in a fixed range and is unlikely to change in the near term," said Chiao [Arthur Chiao, chairman of the Taiwan Electrical and Electronic Manufacturers Association], who is also the chairman of Winbond.

Micron has no semiconductor fabs in South Korea unlike its larger competitors Samsung (OTC:SSNLF) and Hynix (OTC:HXSCF). I presume they would be able to continue to produce at or above current levels in the event of a skirmish on the Korean peninsula.

Wall Street Analysts. Some analysts are tip toeing into the territory of memory shortages. On March 11, Peter Yu of BNP Paribas wrote:

We expect a DRAM supply shortage from 2Q13 onward.

and more, from Joseph Moore of Morgan Stanley initiating coverage on April 8 and showing that both NAND and DRAM will be in short supply for the next two years in a helpful presentation summarized here:

DRAM Demand & Supply, in mn of 1Gb equivalent

2012 2013 2014
Demand 29,766 36,830 47,136
Supply 30,430 35,655 46,906
Sufficiency % 2.2% -3.2% -0.5%
Click to enlarge

Remarkably, despite showing that forecast demand is not met by forecast supply, Morgan Stanley shows the ASP going down from 2013 to 2014 in their bullish case by -10%, in their base case by -21%, and by -40% in their bearish case. This does not square with basic economic theory of supply and demand, nor with the roaring spot and contract increases for DRAM parts, recorded on DRAMexchange.com, which show better than 100% spot market increase already in place since the low in early December 2012.

The report does have an interesting insight on Micron's move to more mobile DRAM and the effect it will have on their capacity:

On the more positive side, in the most recent quarter, growth categories-smartphones, tablets, and servers-represented 15%, 3%, and 12% of demand, respectively, and 30% in total compared to only 22% at this time last year. That should result in some demand acceleration, given that the growth categories grew bits by 79% in 2012. Demand in these segments is completely inelastic [emphasis added] and driven by the technology requirements of the devices, not marketing. Further, we believe that average die sizes for mobile DRAM are ~20% larger than for PC DRAM, so a mix shift towards mobile actually consumes more supply.

Both Yu of Becker Paribas, and Moore of Morgan Stanley, suggest that Micron may swing an entire fab from DRAM to NAND once the Elpida acquisition is closed. Morgan Stanley even nominates the Singapore fab for such a move. At about 6% of the available DRAM WSPM in the industry can you imagine what this would do for an already tight DRAM market?

NAND Demand and Supply, mn of 1Gb equiv

2012 2013 2014
Demand 216,323 323,430 469,762
Supply 222,624 311,534 452,747
Sufficiency % 2.9% -3.7% -3.6%
Click to enlarge

Again, despite showing that their forecast of supply doesn't meet their forecasted demand, Morgan Stanley shows ASPs for NAND going down 2013 to 2014 by -17% in their base case and -25% in their bear case. They do show ASPs going up 8% in their bullish case.

Competitor. An article from April 11 states that the largest factor in the industry, Samsung, is no longer able to keep up with their own demand and has placed orders with Micron's fiancee, Elpida:

Samsung Electronics reportedly has expanded the purchase of memory products from outside, including the purchase of mobile DRAM chips from Elpida Memory as well as NAND flash and eMMC devices from Toshiba.

Samsung's own supply of memory products is already falling short of demand, including that for its Galaxy-series smartphones and tablets, industry sources have claimed.

Any shortage of DRAM and NAND flash chips at Samsung will affect the global memory supply/demand balance, given that the vendor's in-house production capacity accounts for the biggest portion of the world total, the sources said.

Conclusions: Selected chip shortages are already here and the fragility of the memory supply chain is already being questioned in the trade press. I believe Micron has one of the best and safest geographic location of fabs, and after the Rexchip and Elpida acquisitions will have the ability to switch capacity or mothball less productive facilities, further decreasing supply. Micron is already benefiting from scarcity, but this has only just begun.

Disclosure: I am long 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.