Is A Takover In The Cards For Micron?

| About: Micron Technology (MU)

Micron Technology (NASDAQ:MU) is doing a poor job convincing analysts and shareholders that its Elpida acquisition is the wonderful gem that many know it is. But Micron's competitors and customers are no doubt aware of the value that has been created. SA's Russ Fischer has written that maybe Intel (NASDAQ:INTC) could or should be interested in owning Micron, as chip packaging and combinations become more sophisticated.

Who else might be interested?

Apple (NASDAQ:AAPL) is the largest purchaser of computer memory in the world. And Micron is now the largest producer of computer memories. A piece by Lazard underscores the importance of memory to Apple:

"We propose," he [Lazard Capital Market's Edward Parker] writes, "that Apple is a 'storage' company, not only levered to data creation but instrumental in driving data creation in ways its competitors are not. Apple sells storage by delicately but deliberately incenting customers to purchase NAND flash memory at 80%-90% incremental margins. We believe this model is unique in the industry and will ensure Apple avoids the pitfalls of former handset innovators that are rapidly falling into the annals of history."

For those who aren't completely up to speed on what Lazard is saying, consider this. For every 16GB bump in capability on their iPad minis, Apple is charging $100. As the data shows on www.dramexchage they are paying less than $8 for the chips in that upgrade. A quickie way to get to this number is to look at the price on DRAMeXchange for a 16GB MicroSD card. This is more chip and packaging than Apple is using in the upgrade, but it prevents us math challenged finance types from converting from GB to GB. So Lazard is actually a bit light in its own math in the quote above -- Apple is realizing a 92% gross margin on memory when you order an iPad with an upgrade.

So why would the largest consumer of memory want to buy the largest producer of memory in the world? Because Apple should take heed of the largest smartphone manufacturer in the world, Samsung (OTC:SSNLF). Samsung is vertically integrated back into memory chips and processors, while Apple is not. Samsung can either direct the output of their chip fabs to their own internal needs, like smartphones, tablets, and PCs or sell that output on the open market. At times, Samsung even buys chips on the open market to supplement its own production. Apple doesn't have this flexibility, but it should.

But why can't the largest consumer of memory just throw its weight around and continue to buy chips from third parties? Well, that has worked in the past in the boom/bust cycle of memory, but that appears to be changing. What will happen to Apple if all the memory it wants is not available at a great price, as stock research powerhouse Bernstein has posited in their November 4, 2013 piece on the memory market?

Despite weakness in PCs and controlled capacity additions in NAND, we still see undersupply in both DRAM and NAND in 2014, exacerbating in future years. Historically, we believe the memory industry overproduced and hence passed all cost reductions to customers. In the new paradigm we see slower supply growth and more stable pricing.

Could that mean that Apple might find itself in a position where it can only sell the $399 iPad mini and not each 16GB upgrade for $100 at a 92% margin?

In justifying a $41 per share purchase price that Intel could pay, and still have an accretive acquisition, Russ Fischer treated us to a Fischerian mathematical treatise. Let me be simpler in the case of Apple. Yahoo shows their consensus EPS estimate for next year at $47.78. That makes a forward PE of 10.9x. Based on Bernstein's $3.31 EPS estimate for next year, Apple could pay around $36 per share for Micron and still have an accretive acquisition.


Memory is a vital ingredient in Apple's recipe. Getting as much as they want, in the form they need, when they want it, has been part of Apple's success. Increasingly, memory is going to be highly tailored in PoP (package on package) and will be combined with ever more complicated controllers. Hybrids like the PCM/DRAM package found in Nokia's hot selling Asha phone will be more common. Perhaps Apple, more than Intel, understands that owning the last American memory maker still standing is a vital part of their future.

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.