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During the California Gold Rush in the 1800s a few people got rich mining for gold. Some took a different approach and got very rich supplying gold miners with the supplies they needed.

One current gold rush involves using social networking to collect consumer information that, in turn, is used to make a few people very rich. Another current gold rush is the pharmaceutical industry with its new miracle cures. Another gold rush is automated electric cars. Another gold rush is smartphones and tablets. Another is 3D printing. Still another is the Internet of everything. Each of these gold rushes are making a few people very rich.

Common Need in Gold Rushes

They all need increasing amounts of electronic memory. Even future gold rushes that we cannot imagine at this point will need larger amounts of electronic memory.

Limited Supply of Memory for These Gold Rushes

There are only four memory manufacturers: Samsung (OTC:SSNLF), SanDisk (NASDAQ:SNDK), Hynix (OTC:HXSCF), Micron (NASDAQ:MU).

Different Types of Memory

  • DRAM (eight different products)
  • DRAM Modules (11 different products)
  • NAND Flash (four different products)
  • Managed NAND (three different products)
  • NOR Flash (three different products)
  • Solid State Storage (three different products)
  • Multichip Packages
  • Hybrid Memory Cube

These are all made by Micron. More information can be found on their website. Micron memory is used in the following areas: Automotive, Data Centers, Enterprise, Networking Innovations, Personal Storage, Supercomputing Memory, and Ultrathin Solutions. Micron is the largest seller of memory in the world. Samsung makes more memory, but uses enough in its products so that Micron sells more.

Consolidation Into Only Four Memory Manufactures

Consolidation resulted from very high capital costs, constantly changing technology, and fierce competition. Just a few years ago there were more than double the current number of memory manufactures. They are now consolidated into just the four companies. When there were many memory manufactures the competition was cutthroat. The capital costs of building memory manufacturing facilities is in the $5 billion range. To try to increase market share and repay huge loans, manufacturers would cut prices. At times manufacturers were selling memory below cost. This happened in cycles, with the last low in 2011/12.

Micron Survived the Consolidation

Micron as an American company formed an alliance with Intel (NASDAQ:INTC) -- another American company. Among other things this alliance allowed Micron to purchase Elpida -- a consolidated Japanese memory manufacturer. In the process of acquiring Elpida, Micron formed an alliance with Apple (NASDAQ:AAPL). Even though Micron competes with Samsung, Intel and other electronic suppliers, Micron maintains all of these companies as strong customers. In short Micron, survived because it collaborated with other companies and provided valuable products and services.

Micron's Collaborative Approach Brings Prosperity

  1. Collaboration works as each party in the collaboration needs the other party. Two examples: Apple needs a reliable source for small, efficient and low energy use memory and Micron needs a strong and stable market for its memory. Intel needs a reliable source for memory that uses the latest technology and Micron needs a strong and stable market.
  2. As new memory technology is developed and produced, collaboration among big players like Micron and Intel will facilitate establishing a new and profitable standard. 3D memory is one example. Having a clear standard early for new technology makes new technology less risky and more efficient. Losses associated with competing standards are reduced.
  3. Two industry leader heads are better than one when it comes to developing and producing new products. Micron works with multiple technology companies like Intel and Apple to develop and produce advanced memory technology that meets the specific needs of companies like Intel and Apple. Micron brings a high level of memory expertise and production capability to meet the varied needs of multiple technology companies. Micron benefits from learning about other technology advances.
  4. Collaboration with the likes of Intel and Apple will solidify Micron's place in the stock market. Micron stock value has suffered from past cyclical issues. FinViz currently has a forward-looking price-to-earnings ratio of 9.3 for Micron (FinViz's forward P/E as of Dec. 31, 2013, uses the last closing price of $21.30 divided by the average of analysts' next-year earnings estimates of $2.29). FinViz calculates the future P/E for Sandisk, Intel and Apple as 12.1, 13.5 and 11.7, respectively. Collaborations add stability and consistency to Micron and will help increase Micron's forward P/E to approximately 12. An increase in forward P/E from 9.3 to 12 alone would increase Micron stock by 28%.
  5. Collaboration reduces competition. If two companies are collaborating they may still compete but the competition is more likely to avoid cutthroat approaches that have resulted in cyclical ups and downs.

No More Memory Makers in the Foreseeable Future

There are two possible ways a new memory manufacturer could arrive on the scene: 1) a new company, or 2) a current large semiconductor company expands into memory.

A new memory company is extremely unlikely due to:

  • high capital costs for memory production
  • technology advances require constant research and development
  • new technologies require large capital investments every few years
  • memory is becoming much more customized, so a memory company must have technical expertise and collaborative connections with memory users

Expansion of a current large semiconductor company into memory is unlikely for the above reasons and because all of the companies that could expand into memory already have a collaborative connection to Micron. They therefore do not need to take on the new risks associated with memory production, and they probably could not compete with the expertise and low-cost production that currently exists in Micron.

Micron Has Superior Expertise and Lower Production Costs

The very low-cost acquisition of Elpida during a down cycle in memory gives Micron a huge leg up on the competition. The acquisition of Elpida has been covered extensively on Seeking Alpha by Russ Fischer. In summary, the Elpida acquisition provided Micron greatly expanded production capability at a fraction of the cost of building new capacity and synergistically added very talented memory experts.

Lagging Recognition of Micron Stock Value by Most Analysts

Most analysts statistically examine past performance as they try to estimate future earnings. They rely on information provided by the stock company management team. Rarely do they do the type of in-depth research that Seeking Alpha contributors have performed scouring SEC documents. Those SA contributors include Russ Fischer, Jeret Wilson, Electric-phred, and Retired Securities Attorney.

Regarding statistics, my college statistic professor wisely warned that there are "liars, damn liars and statisticians." A math professor friend was proud that he could prove that 2 + 2 = 3. Basically, assumptions and complex analytical statistics and math can be used to "prove" just about anything. Beware of analytical analyses that you do not fully understand.

Lack of Clarity by Micron Management

Micron management provides all information that the SEC requires that they provide and not much more. The primary reason is that they have collaborative relationships with many customer/clients that compete with one another. Even the smallest pieces of information can prove fatal to such sensitive and critical relationships. The wisest approach is therefore to limit the amount shared with the public and shareholders.

Micron Stock Is Going Up

Analysts estimates range from $16 to $30 per share of Micron with an average of $23 (I do not understand why they call the average a consensus -- a consensus indicates they all agree, when they obviously don't). Micron management has indicated through estimates for various products and margins that they expect earnings of $3.50 per share for 2014 (see here), which indicates a stock price of $33 to $42. Past 2014 there have been rumors on SA of earnings of $6 per share based partially on low capital costs associated with the purchase of Elpida. Earnings of $6 per share would indicate a stock price of $56 to $72 -- beyond 2014.

A Stockchart candle volume chart (projection based on the last 16 months) indicates that $30 per share may be reached by July 2014. In this Micron presentation, listen for the repeated statements about increasing demand, increasing customization, increasing margins, increasing profits and increased earnings. I have never heard Micron management speak so confidently about increased earnings.

Jan. 7, 2014

This will be the day Micron announces earnings for the last quarter. For the past two earnings reports the stock rose rapidly prior to earnings, and then due to confusing statements during the earnings conference call, the stock dropped. Will this pattern repeat? The market appears to have already made its Micron earnings adjustment -- starting a drop in mid-December. Unless the market runs up Micron stock over the next several days, there will be no large run-up prior to earnings.

Micron had some good reasons to be unclear during the last two earnings reports including:

  • With the very low purchase price for Elpida fresh, management did not want to gloat too much for fear of messing up the Elpida closing in July.
  • Micron management option prices were not set until after the October earnings (when the stock price was low).
  • Management desired to address the convertible bonds and repurchase some of the bonds to reduce company debt -- before the stock price went up more and increased the cost to repurchase the convertible bonds.

The purchase of Elpida is no longer fresh, managements option deals have been set, convertible bonds have been addressed and Micron management has stated that this earnings statement will be very clear. The lack of run-up right before earnings and the clearer report to come from management indicates to me that the earnings report will clearly identify solid earnings and a bright future and that the stock price will rise after earnings.

Level of Confidence in Micron Management

I, and others on SA, have been carefully tracking Micron management. I listen to earnings statements, listen to presentations and correspond with Investor Relations through email. I make note of what they say and then see if they do what they say they will do. So far, I have not been disappointed. They don't say a lot, but they do what they say they will do. That gives me some confidence in them.

Concluding Remarks

Being one of three or four memory manufactures makes Micron's future in providing memory to the high-tech gold rush very bright. Add to this the low cost purchase of Elpida production capability and expertise. Then consider the high cost for anyone to enter the memory manufacturing business and the collaborations that Micron has nurtured. As long as Micron management does not mess up, Micron stock price will likely increase dramatically over the next several weeks, months, and years. Micron management -- we are watching.

Disclosure: I own no MU stock, only far out and out-of-the-money Micron call options. 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.

Source: Micron: Memory For The Gold Rush