Apple's iPhone Could Create Memory Shortage

According to recent reports from Apple (AAPL) Insider, “An existing $1.25 billion dollar arrangement between Apple and the world’s largest memory makers was designed to secure the iPod maker an ample supply of NAND flash memory through 2010, but Apple is now reported to be asking for even more chips ahead of iPhone.

Taiwan-based DigiTimes, which wavers in accuracy but has recently nailed a scoop or two, is reporting that Apple has been in talks with Samsung for the purchase of a volume of NAND flash to be used in all iPods and iPhones from June to year-end. The report cites “sources” in saying Apple is asking for 400 - 500 million 4Gbit NAND flash equivalent chips, which is approximately 10 to 15 percent more than the two firms had agreed upon earlier.

There are several firms that make the NAND memory and if the iPhone is successful, there could actually be a shortage of inventory. This is good for several firms as there has been a glut of memory available and prices have been declining for several years. They look to do so for some time to come, unless the capacity reaches a level where it will be usable as a replacement for disk drives. In other words, solid state desktop and laptops which will no longer use rotating drives for storage.

In a report Thursday, ARS Tecnica writes that -

Despite the dramatic cutback in growth projections, demand for products that rely on these devices remains strong. The SIA expects to see growth across the various product markets that it monitors.

There are several benefactors of this possibility, but the most obvious seems to be Samsung, Micron Technology (MU) and SanDisk (SNDK). The shares have been trading all over the map during the past year as there has been a margin compression and sales have softened. But lately, it seems that this has been turning around and the shares have been moving higher.

Even with prices falling (Moores Law effect) there may be such a strong demand that these companies will benefit as there is a sea change occurring in the area of memory.

Disclosure: Horowitz & Company Clients are long SNDK.

Comments

[Winston Kotzan:]

For one product alone sold by only one carrier to significantly shift the supply curve long enough to substantially affect the stock price of a whole subsector of semis.... sounds like a bit of a long shot.

2007 Jun 16 12:18 AM

[Cameron Fisher:]

This phone has more than 8x the embedded flash capacity of other phones on the market, and it has the brand awareness from the iPod. It will certainly have an impact on the flash supply next year.

2007 Jun 16 11:49 AM

[roger.canada:]

I agree with both Cameron and Winston which may sound like a contradiction but its not really.

Winston is correct it shouldn't change the sector over a 12 month or longer period but stock prices especially over the long-term are largely based on hype which the iPhone has lots of and when you consider that the iPhone has a minimum of 4x the flash capacity to 50x when comparing across the smartphone range you have to conclude there will be an impact but whether it is sustained, whether it grows the smartphone market and also if it causes iPhone competitors to follow suit and add substantial capacity of their own.

This last scenario is my favourite and very probable I feel. If competitors follow iPhone and they probably will then that means a dramatic increase in demand and then in this scenario iPhone because the 'harbinger' of future demand no?

Lastly the sad downside of this sudden tightening is that prices could decrease more slowly which sadly will affect another area that personally I would like to see more innovation and that is the hybrid hard-drive with its 'flash' and platter based storage.

Instant on laptops, faster, longer battery life, those are more important to me than a phone that has a couple gigs of memory. But who am I to argue with market demand.

Winston, Cameron what do you guys think?

2007 Jun 18 03:51 AM

[Winston Kotzan:]

Its possible that if competitors start jumping in and it starts a product upgrade cycle you might see some movement in the flash prices. That is a more likely scenario. But unless there is some other sort of catalyst, I wouldn't bet my money on any earnings surprises!

2007 Jun 18 11:55 PM

[Tech:]

still plenty of suppliers! still a lot of parts in stock!
it takes only a quarter to launch a full batch of new prod!
make your mind !

2007 Jun 18 06:19 AM

[roger.canada:]

Hi Michael

I am not following you at all, perhaps you could be more verbose?

Thanks
Roger.canada

2007 Jun 18 09:57 AM

[Cameron Fisher:]

Don't under estimate the power of Apple. Their decision to go to flash on the IPOD killed the 1inch HD market. I think that competitors will definitely follow suite with respect to capacity. They announcement of Samsung's moviMCP was an attempt to anticipate the demand. The spec can also be matched with a combination of internal and expansion memory (MMC/SD). This is more attractive because it reduces initial handset cost. My conclusion is that it will impact demand, but in the next 1-2 years, not this year. The rise of the SSD will further the demand, and consume large quantities of Nand. I think the two year horizon for these is quite good.

2007 Jun 19 01:57 PM