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Summary

  • Third party memory retailers depend on a declining number of suppliers.
  • Antitrust and anticompetitive regulatory scrutiny.
  • NAND Consolidation.

Micron Technology (NASDAQ:MU) remains compelling. There has been discussion and coverage of the fact that the memory supply industry has consolidated. Retail opportunities do not seem to have received as much attention.

In a May 18th Industry Report available to clients, Sterne Agee reiterates its Buy ratings on Micron, and also NAND-reliant competitor SanDisk (NASDAQ:SNDK). Key points are:

1) The number of DRAM-NAND suppliers is down 60% from 2009 to 2013;

2) The same number of third-party memory retailers was around from 2009 to 2013. There is a significant opportunity for SanDisk and Micron to gain retail market share with consolidation.

  • #1 Kingston has ~50% of the $7B retail market,
  • #2 Ramaxel Technology, the largest memory retail distributor in China, has ~6.5% market share [of] a fragmented market.
  • #4 Smart Modular was acquired by SanDisk in 3Q13.

3) They depend on memory supply from SNDK-MU, among others.

The table on the left below shows how market share has benefited from consolidation; and the graphic on the right shows that Micron/Crucial is enjoying a 30 basis point improvement in share of the $7B industry.

(click to enlarge)

The data speaks for itself.

There are some considerations, however. The corporation's current Form 10Q discloses extensive and ongoing antitrust litigation (Pg.19). Though a June 2013 settlement agreement has been reached that should resolve "indirect purchaser cases," the document says it is unable to predict an outcome pertaining to when:

…The Attorneys General for approximately forty U.S. states and territories filed suit in the U.S. District Court for the Northern District of California. The complaints allege, among other things, violations of the Sherman Act, Cartwright Act, and certain other states' consumer protection and antitrust laws and seek joint and several damages, trebled, as well as injunctive and other relief. On October 3, 2008, the California Attorney General filed a similar lawsuit in California Superior Court, purportedly on behalf of local California government entities, alleging, among other things, violations of the Cartwright Act and state unfair competition law.

Another open matter is that:

On June 21, 2010, the Brazil Secretariat of Economic Law of the Ministry of Justice ("SDE") announced that it had initiated an investigation relating to alleged anticompetitive activities within the DRAM industry. The SDE's Notice of Investigation names various DRAM manufacturers and certain executives, including us, and focuses on the period from July 1998 to June 2002.

Additionally, there is reason for caution about the fact that Micron is deeply dependent upon DRAM memory. Among its segments, Dram Solutions Group ("DSG"), Wireless Solutions Group ("WSG"), and Embedded Solutions Group ("ESG") all include DRAM. Aside from DSG, they all include NAND. Three charts summarizing graphical data from the Second Quarter, ended February 27, 2014, in which the company soundly beat on top and bottom lines, follow. Their source is the quarterly filing.

While cases are made for diversification, a high current percentage of sales is attributed to DRAM.

Turning to Operating Income, there is an even heavier weighting to DSG. (There is also an "Unallocated" entry under Operating Income that contains no data for Q2 2014 or Q2 2013):

NAND consolidation should help the company and serve to mitigate some risks to investors. Sterne Agee foresees forward integration of the supply chain and potential acquisition of memory module makers. It observes that SK Hynix has not added any capacity in 2H14. Further, "Samsung...is moving to 20nm DRAM, but cycle time on 20nm DRAM is 'one month longer than the 25nm DRAM.'"

Here is how things are currently:

The Micron story involves consolidation to an extent that there might even be reason for uneasiness. Indeed, the corporation is defending itself against substantial antitrust and anticompetitive regulatory scrutiny involving past matters. Amidst all of it, improving NAND results would be welcome.

Source: NAND Consolidation Should Benefit Micron