Ideal Industry Conditions Make Micron A Safe Investment Bet

Jun.24.14 | About: Micron Technology (MU)

Summary

The consolidation in DRAM markets has concentrated the supply in hands of a few players in the industry. Micron, along with Elpida, has gained well from this consolidation.

If the rumors around the launch of iPhone materialize, then Micron will see massive business coming from Apple in the current year.

Besides DRAM, NAND markets are also witnessing a spur in demand because of Solid-State Drives, and Micron might step up its production and sales in forthcoming quarters.

The shares of Micron (NASDAQ:MU) have surged a phenomenal 144% over the last year, whereas the S&P 500 index expanded by 20 percentage points during the same time. The growth in performance of the company can be attributed to a credible improvement in the demand for DRAM memory. The company's quarterly results are an evidence of a strong comeback to topline growth. For instance, the revenue in Q2, 2014 saw a surge of 98% when compared to the revenues in Q2, 2013. The improving consolidation in DRAM markets that commenced after the fire at the SK Hynix Wuxi facility resulted in favorable industry conditions and contributed to the exceptional performance exhibited by Micron.

Further consolidation

It has been anticipated by the analysts that the DRAM markets will see further consolidation because of tightening supply. The growth of smart devices has led to a surge in the demand of mobile DRAM, and Micron and other industry players, including Samsung (OTC:SSNLF), have gained immensely. The reduction in demand for memory chips due to the ongoing contraction in demand for PCs has been well-compensated by the surge in demand for mobile DRAM. It is worthwhile to note that the company makes approximately 70% of its revenue from the DRAM segment, of which, around 30% is generated from sale of mobile DRAM.

Stock upgraded

Recently, the shares of Micron saw an upside movement also because of the upgrades given by analysts. Of them, Credit Suisse's Jonathan Pitzer, reiterated an Outperform rating on Micron and raised his price target to $50 from $30, writing that enterprise demand could spur DRAM sales for the first time since 1994/1995. Additionally, Merrill Lynch also raised its rating for Micron to "Buy," citing the building of DRAM shortage and more consolidation happening in the near future.

Apple: The key customer

Among others, one of the biggest clients of Micron is Apple Corporation (NASDAQ:AAPL), and it would not be wrong to say that the manufacturer of iPhones and other smart devices provides a significant opportunity to Micron in mobile DRAM markets. It is rumored that Apple is poised to launch iPhone 6 in 2014, with a score of new features which could translate into a massive opportunity for Micron

It is worthwhile to note that besides catapulting Micron to the position of second-largest manufacturer in the semiconductor space, the takeover of Elpida also helped Micron bag Apple's account for managing the entire supply of mobile DRAM. In fact, if the speculation on the Street is to be believed, the acquisition of Elpida for $2.5 billion might have been motivated by keeping Apple's interest in shifting its entire demand for mDRAM from Samsung to another vendor. Therefore, it is improbable that Apple will be looking at switching vendors anytime soon, as a result of which Micron and Elpida's combination will be getting colossal business from Apple.

NAND has many opportunities and challenges

While DRAM is going to be the primary factor in driving growth for Micron, the company is also making reasonable churn in the NAND market, essentially because of the surge in demand for Solid-State Drives (SSDs). As mentioned by the management in its earnings call last quarter, around 45% of Micron's NAND business is related to SSD, that includes both selling Micron-branded SSDs and also selling components to third-party manufacturers of SSDs.

This surge in demand for NAND memory has also impacted the price of NAND flash in a favorable way. In the last year, the rate of decline in NAND flash prices reduced to 5.6%. However, the competition in the NAND-driven markets is relatively fierce, and hence, Micron has to ensure that it commences the production of SSDs on a larger scale in order to protect its share from being poached by giants like Samsung and Marvell (NASDAQ:MRVL).

Both Samsung and Marvell are already on the verge of introducing ground-breaking variations in their SSD product portfolio, which might affect the market share of Micron in the short run. For instance, Samsung has already claimed that it is in the process of producing the first vertical 3D NAND flash Solid-State Disk Drive to hit the consumer markets.

On the other hand, Marvell is attempting to strengthen its leadership in the SSD industry with the launch of its new 88SS1083 PCI Express (PCIe) solid-state drive controller -a two-lane PCIe Gen2 SSD controller with performance transfer rates up to 1GB/s. In nutshell, Micron will have to watch out for the challenges in the NAND-driven SSD products, and ensure agility in its operations.

Final words

It is beyond doubt that Micron has the required capacity to generate growth in the coming quarters owing to further consolidation and favorable industry conditions. The NAND flash market is a high growth area because of the expanding demand of SSDs. As I already mentioned above, the NAND market is highly competitive, and Micron needs to focus on driving economies of scale in the production of Solid-State Drives to produce cost-efficient products. In conclusion, the investors of Micron can expect a valuable year ahead as the semiconductor giant rides on a healthy demand and stabilizing prices.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.