Micron And SanDisk Lead A Mobile Shakeup

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Includes: AAPL, ARMH, INTC, MU, SSNLF, WDC
by: Ed McKernan

Summary

DRAM Prices expected to continue to rise.

Micron and SanDisk gain traction relative to processors on the mobile platform.

Micron and SanDisk valuation will allow them to acquire additional influence.

The post Y2K trough for Micron (NASDAQ:MU) came not in 2002 but in late 2008 when its stock was selling for roughly $2. The financial crises quickened the final memory consolidation that sidelined Qimonda, many of the Taiwanese bit players and the previously large conglomerate of NEC and Hitachi (OTC:HICTF) named Elpida (OTC:ELPDF), a Greek word meaning "Hope". A bankruptcy in 2012 brought Micron to the table in a timely acquisition, just prior to the Great Japanese Yen devaluation. And now there are two DRAM giants controlling the electronics equivalent of OPEC in a time of shortage as the mobile market continued its double digit growth.

Micron was here before, peaking in late August 1995 as PC OEMs rushed to market their Win95 machines loaded with DRAM to support the new O/S. Many semiconductor makers bet the constrained capacity of the foundries on winning majority share only to take part in the ensuing slide. Many were washed away, except Intel (NASDAQ:INTC) which reigned supreme as a near sole source.

With all analyst eyes focused on the struggle between ARM, its licensees and Intel, the unthinkable has happened. Memory has stolen the show in DRAM and NAND. While Intel pours billions into mobile atom that will never make it into the market in any significant way being boxed out by low cost ARM (NASDAQ:ARMH) vendors and Apple's (NASDAQ:AAPL) home grown solution, the positive cash flow pours into the memory guys' bank accounts. Why the surprised look?

Why is this a conundrum?

In the server market, Intel is paid richly for its large caches which provide a level of performance and efficiency that is multiple times that of DRAM, however it takes up much more space and therefore poses a limit as to what can be put on a chip. Intel will continue to expand its caches at each node but control of the platform would be much more if it could reach outside the server processor to control the DRAM and NAND footprints.

When Micron bottomed during the financial crises of 2008 it had a market cap of roughly $2B. Three and a half years later, in July 2012, when it was worth just $6.5B it offered $2.5B to take over Elpida with all its debt in order to narrow the field. The investment has paid off in spades as two years later its valuation has exploded to $35B.

What no analyst has mentioned, but what should be on the minds of everyone, is what happens if Samsung (OTC:SSNLF), SanDisk (SNDK) and Micron continue to rise at the expense of the rest of the semiconductor industry. With news out that the market is expecting contract memory prices to rise in July, we are entering a period of high and gyrating spot prices that will result in most smartphone and tablet players operating at the mercy of the market. In these times Apple will likely gain at its competitors' expense.

What if memory is taking on the role that Intel had in the 1990s, when every square inch of real estate maximized around its processor and chipset at the expense of others? It is not inconceivable that Micron and SanDisk continue to soar and the platform leaders flip. With their inflated currency, Micron and SanDisk would have the wherewithal to buy other key pieces and attempt to exert greater control on the future of mobile and possibly go vertical at the expense of the Foundries. Unthinkable? Perhaps, but it's time to shake up all the mobile endgame scenarios.

Disclosure: The author is long AAPL, QQQ. 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.