Micron Technology (MU), a leading manufacturer of memory products, has seen its stock price climb by more than 100% since the start of 2013. Improving market dynamics, rising demand, its acquisition of Elpida Memory and stabilizing NAND and DRAM prices are some of the key factors responsible for the positive sentiment around the company.
The 12% sequential rise in Micron’s Q3 2013 revenues confirm that the memory market dynamics are improving. The company returned to profitability with a net income of $43 million for the quarter after incurring losses for several consecutive quarters. With declining inventory across its product portfolio, rising content growth across devices and an industry shift to higher growth markets -- mobile, server, networking enterprise and embedded -- we believe the memory market can revive this year onward.
Our price estimate of $13.50 for Micron is in line with the current market price. We think that Micron is well-positioned to leverage future growth potential in the memory market. In this article we discuss certain key trends driving demand in the memory market.
Consolidation in the Industry
The memory market is highly cyclical in nature. The increasing number of manufactures in the market combined with slow demand lowered profitability of memory products in 2012. However, with the ongoing consolidation in the memory market Micron claims to be seeing growing strength in its DRAM and NAND memory portfolio. With manufacturers holding back supply and improving macro environment fueling demand, the market dynamics in the industry are improving. In its summer analyst conference this month, Micron pointed out that "… for the first time really in the industry now we have rational competitors looking at what is the best way to deal with their capacity in order to optimize the value that they are delivering to the customers."
Micron along with other players in the market are focusing on how to leverage their existing technology to deliver value-added system to their customers. A higher proportion of its R&D expense is not for advancing process technology nodes, but for building the infrastructure that support existing advanced memory systems.
Capital spending in the DRAM market in the last few years have been more focused on technology migration rather than on building new capacity. In the NAND space, a significant portion of the capital spends by Micron is being utilized for transitioning the additional fab capacity from DRAM to NAND and a majority of it is being utilized for building greenfield cleanroom floor space and early pilot line for 3D NAND.
Micron anticipates its capital expenditure to be around $1.5 billion this year and in the range of $2.6-$3.3 billion in 2014. Two-third of Micron’s estimated capex will be spent on DRAM conversions and the rest on NAND conversions.
NAND Is the Most Rapidly Growing Memory Product
During its analyst day conference, Micron declared that NAND products are the most rapidly growing and the most elastic piece of the memory market. Semiconductor equipment provider, Applied Materials believes that the NAND demand will grow by approximately 50% in 2013.
The rising global mobile shipments and increasing demand for SSD’s are the most important trends driving current demand for NAND Flash products. According to iSuppli, NAND shipments for tablets are forecast to reach 12.3 billion Gb by 2014. Rapidly rising smartphone and tablet shipments provide high growth opportunities for NAND products which Micron claims offer better margins.
NAND shipments to the SSD segment represented more than 60% of Micron’s Trade NAND capacity in Q3 2013, and the company expects to see strong demand in the subsequent quarters as well. The company is also witnessing strong growth in higher value categories such as automotive.
Expanding Demand for Mobile DRAM
With the slowdown in PC shipments, the growing demand for smartphones and tablets is expected to drive demand for memory products. During Q2 2012, the share of PCs in global DRAM shipments declined below 50% for the first time since 1980. On the contrary, mobile DRAM’s market share in total DRAM shipments has been rising. The combined share of mobile handsets and tablets in the DRAM market is estimated to reach 26.7% by the end of 2013, almost double from 14.1% in Q1 2012.
Micron is the leader in enterprise DRAM solutions for networking and server but generates less than 10% of its revenue from mobile DRAM. Elpida, on the other hand, has a strong presence in mobile DRAM and around two-third of its business is dedicated to the segment. Elpida’s portfolio offers characteristics such as high-density, high-speed, low power and small packaging profiles, which are important for mobile devices. With Elpida’s acquisition, Micron now has a stronger mobile portfolio which places it in a stronger position to leverage growth in the mobile DRAM market (see "Micron Becomes The Second Largest DRAM Player By Acquiring Elpida").
Stabilizing DRAM and NAND Prices
The memory product prices have significantly improved in the last few months as strong demand for DRAM and NAND products coupled with their restricted supply has eased pressure from memory products prices. Since manufacturers are devoting their capacity to produce mobile DRAM products the commodity DRAM products have been in short supply. Thus, buyers are building up their commodity DRAM inventory to avoid any potential supply shortage in the future. Additionally, while supplier have not increased their manufacturing capacity, the demand for NAND is increasing due to rising mobile and SSD shipments and higher memory content in these devices.
The trend might not last in the long run as the underlying cause for the price rise is more due to the strategic move of OEMs rather than any fundamental change in market demand for commodity DRAM. Micron stated in its analysts conference that in the last quarter there has been some softening in NAND and DRAM prices due to low volumes on the spot market. However, the company’s exposure to the spot market is is very low and its OEM contract pricing has remained pretty strong and stable (see "Micron Gains Momentum As Memory Product Prices Improve").
Disclosure: No positions.