- A comparison of two strong memory companies.
- SanDisk has some weaknesses that might not be easily overcome.
- Micron's weaknesses will get fixed in the near future.
This will be some attempt at analyzing the operational strengths and weaknesses of these two fine memory companies. I will miss something; that's what the comments section is for.
SanDisk (NASDAQ:SNDK) positives:
1. SanDisk is NAND only. At times, specialization in a product category is a definite advantage.
2. SanDisk generates 12% of its revenue as license and royalties on NAND flash technology. Since royalty revenue is virtually cost free, about 35% of operating profit comes from royalty revenue. After tax earnings are about 37% from royalties.
3. About 40% of SanDisk revenue is in the retail sector for such things as thumb drives and SD memory cards.
4. Toshiba is the manufacturing partner for SanDisk. Toshiba is the sole surviving Japanese memory manufacturer. Since the 1970s, Toshiba has had a reputation as an exceptionally competent semiconductor manufacturer.
1. SanDisk is NAND only. Specialization is a two-edged sword. Not having a full line of memory products can leave a supplier open to package leveraging by competitors. SanDisk is unable to move NAND production to DRAM if the market requires it.
2. Royalties: License and royalty revenue are based on patents. Patents expire and these patents are getting long in the tooth. Therefore, 37% of net earnings are at risk.
3. Expansion of production facilities will be time consuming and highly visible.
Micron (NASDAQ:MU) positives:
1. Broad supplier of various memory technologies. Can move production back and forth between DRAM and NAND. Can supply a complete package of product to key customers.
2. Micron (and IMFT) are the only NAND manufacturers that do not pay royalties to SanDisk.
3. At nearly three times the size of SanDisk, Micron has the advantage of scale.
4. Micron has a globally diversified manufacturing base. Remember the Hynix fire?
5. Micron has Intel (NASDAQ:INTC) for a technology and manufacturing partner. The IMFT (Intel Micron Flash Technologies) joint venture is a huge and flexible resource for both Intel and Micron.
6. Micron is in production with the smallest 2D NAND geometry node (16nm)
1. Micron is a step behind Samsung and Hynix in DRAM technology. Micron is still on the 30nm node, but expects to move to 25 and 20 nm during 2014.
2. Micron is about a billion dollars smaller than SanDisk in NAND memory.
3. Micron is lagging SanDisk in SSD shipments. Micron was busy buying Elpida while SanDisk was buying third-party SSD companies.
Given the above, my personal favorite of these two great companies is Micron by a large margin.
The reason that Micron is the only NAND supplier to not pay royalties to SanDisk is that all the Micron NAND operations began as Intel business units and Intel and SanDisk signed a flash memory patent cross license back in 1995.
Depending on the source, NAND based solid state drives are growing at least at a 50% compound annual rate at the expense of HDDs (Hard Disk Drives). There is no question that the memory companies will need more NAND fab capacity in the near future.
Now here's the gotcha about that. All other NAND manufacturers will have to spend $5 billion plus for new fabs and wait 2-3 years for output. Micron, through IMFT, will likely have access to the surplus Intel fabs. When the conversion to 14nm is complete at Intel, there should be several, fully-depreciated, but still modern, 22nm fabs available for the IMFT joint venture.
Let me guess that an excess 22nm Intel fab capable of 80K NAND WSPM should be depreciated down to land and building or about $1 billion. If this fab were moved to IMFT, Micron would pay $500 million to Intel (via IMFT) for the fab and another $500 million ($1 billion total, $500 million from Intel) to re-fit it for memory. The end result is that Micron would have $1 billion in a fab valued (to re-produce) at $2.5 billion. That would result in 40% of the depreciation of building new. For Intel's share, the new depreciable cost would be $500 million or 20% of the depreciation expense of building new.
According to DRAMeXchange, asset depreciation for memory manufacturers is 40-50% of the total cost to produce these parts. In the above magical move, Intel becomes the industry's low cost NAND producer with only about 8-10% depreciation and Micron becomes the second to the lowest cost producer at 16-20% depreciation. Does this cost structure push 3D NAND back even further?
So, in summary, this year Micron will fix their position in DRAM to become competitive in scale and cost to Samsung.
Sometime in the future Micron be able to bring on additional NAND capacity faster and at lower cost than any competitor as the demand for SSDs grows. Both of these moves add multiple billions of dollars in revenue to Micron's already annualized $16 billion sales.
There is still a double in Micron, but it won't be easy on the nerves. If roller coasters make you sick find another 100% sure-thing gainer.