Micron And SanDisk: A Tale Of 2 Memory Companies

May.28.13 | About: Micron Technology (MU)

Micron (NASDAQ:MU) and SanDisk (SNDK) are two US based manufacturers of semiconductor memory devices.

Micron is a broad line manufacturer of DRAM, NAND flash, and NOR flash memory, while SanDisk make only NAND flash memory through a joint venture with Toshiba of Japan.

Both companies produce high level memory system solutions, both make SSDs (Solid State Drives), both make camera and cellphone memory micro cards and both make the ubiquitous UBS "thumb" drives. Micron also uses some of their DRAM capacity to make DRAM modules used in PCs and other computing equipment.

SanDisk's primary business is NAND based solution products and only sells NAND at the component level when they have extra parts that can't be sold in finished products. The company is committed to take about 35% of the output of the Toshiba fabs; Toshiba markets the 65% balance of the output primarily as components.

Micron is the mirror image of the above model; Micron sells primarily component level memory chips, but the company is becoming a large and growing factor in SSDs and the other memory end products.

Micron is involved in a joint venture with Intel that had spawned a 100,000 wafer start per month, state of the art NAND manufacturing facility located in Singapore. Micron and Intel have co-operated in the development of the Hybrid Memory Cube that was named the EE Times memory product of the year.

The Micron/Intel joint venture began as a NAND only arrangement and was modified in February of 2012 to include the development of emerging memory technology.

In recent earnings presentations, both companies have advised the investing community that while they expect "tight" supply of NAND memory going forward, neither company is planning any new manufacturing capacity. The reason cited by both companies is, "3D NAND is close enough on the horizon that we don't want to spend the money on 2D equipment and have to re-spend on 3D equipment. Neither company gave any specifics on when either of them could be in production with 3D NAND. I find this position strange and unprecedented in the semiconductor industry for reasons I will cover later.

SanDisk makes only NAND, is selling all they can and is planning no capacity additions. Current sales are about $5.2 billion per year.

Micron makes a variety of memory which allows them to alter their DRAM/NAND capacity profile. The company is in the final stages of acquiring Elpida Memories of Japan at a fraction of the replacement cost. According to Mark Adams, President of Micron, the combined companies will have sales of $16 billion (12 min point). Elpida provides Micron an important missing link in the memory business; mobile DRAM used in smartphones. Actually it is a twofer since now Elpida can get the NAND chips from Micron that go into the multi-chip packages in all those smartphones. SanDisk/Toshiba have to buy mobile DRAM on the open market for inclusion in MCPs.

The point of all of this is that we have two quite comparable companies selling identical products into the same market. Therefore, it would seem reasonable that the two companies should have a comparable value in terms of price to sales ratio.

The problem with this view is that we have a stable SanDisk (no path to growth, but stable.) On the other hand we have a pre-Elpida Micron and a post-Elpida Micron to consider.

Here's how that looks:

Company Sales Net Margin P/S Ratio
SanDisk $5.2B 12.3% 2.69
Pre-Elpida Micron $8.3B -13.7% 1.48
Post-Elpida Micron $16B 12.3%E 0.75
Click to enlarge

I am making some assumptions about the Post-Elpida Micron, such as the company, with the recent 100% price increase in DRAM prices and the rumored profitability turn-around of Elpida should earn similar margins to SanDisk. After the closing of the Elpida deal, both companies should grow at about the same rate, maybe 10% per year. My handy-dandy valuation formula would value both companies at about 2.4 time's sales. SanDisk at about $52/share and Post-Elpida Micron at about $38.

So, the conclusion is that SanDisk will do a little downward price adjustment and Post-Elpida Micron will more than triple. I think I know what the right thing to do is.

Now, about that no-new-capacity-for-NAND thing. Intel (NASDAQ:INTC) is releasing the new, very power efficient Haswell CPU family at Computex during the week of June 3, 2013. The Haswell is all about light, thin, and long battery life. Most people buying a Haswell based PC will want to use a Solid State Drive instead of a power hog, slow, heavy HDD. SSDs are made from NAND flash memory. In an unimaginably bad PC market, Intel will still sell 300 million mostly Haswell chips in the next twelve month period. If only one third of those chips sold required SSDs, the industry would have to thumb up about 1.2 billion 128Gb NAND chips. That number converts to about 4.8 million NAND wafers. That is about four times the output of the huge NAND fab built in Singapore by Micron and Intel. Everything I read says the NAND memory supply/demand is in approximate balance today.

So, the big, huge, giant question is, "Where is all the NAND going to come from?"

This is big problem and someone isn't showing us all their cards, but however this is solved, Post-Elpida Micron, as the world's largest merchant market supplier of memory, and SanDisk/Toshiba will be right in the middle of it. My personal favorite of the two, by a wide margin, is Micron.

Disclosure: I am long MU, INTC. 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.