Seeking Alpha
Long/short equity, contrarian, independent research, tech
Profile| Send Message|
( followers)  

Companies that make a product that is very likely to be in high demand for the foreseeable future are attractive investments if they can be snagged at the right price. One such company is Micron (NASDAQ:MU), a semiconductor company that develops memory products (DRAM, flash memory). For a number of reasons, I believe that this company is an excellent long term investment in the future of computing for two very important reasons:

Explosive Solid State Drive Growth

If there's one under appreciated corner of technology that's making a roaring comeback, it's storage. Today's hot solid state drive technology is critically dependent on NAND flash memory to store data. By far the largest cost in the bill of materials for a solid state drive is the flash, so by being one of the few companies that has its own NAND fabrication plants, it not only is able to maintain healthier margins on its own branded drives, but it can leverage its infrastructure by selling NAND to the countless fabless solid state drive manufacturers.

With the proliferation of form factors such as smartphones, tablets, and "thin and light" notebooks, and the increasing reliance on storing data in the cloud, it's clear that OEMs will need to resort to flash memory solutions. It's hard to stick a 1TB hard disk into a tablet, but it's significantly easier to embed 16GB of flash. And for higher end notebooks, it's very likely that the primary drives going forward will be solid state for speed and durability reasons (see the new Apple (NASDAQ:AAPL) MacBook, for instance) and that for bulk storage, traditional hard disk drives will be external, secondary drives.

The data center/enterprise sector will still likely rely on traditional hard disk drives for the foreseeable future, but flash technology is seeing increasing adoption in this area. Seagate (NASDAQ:STX) already has what are called "hybrid" drives on the market, that combine traditional magnetic platters with a small NAND flash cache to store the most frequently accessed data (this, ultimately, lowers the average data access time). Western Digital (NASDAQ:WDC) has confirmed that it is working on bringing similar drives to market.

In addition, companies such as Fusion-IO (NYSE:FIO), OCZ Technology Group (NASDAQ:OCZ), STEC (NASDAQ:STEC), LSI (NASDAQ:LSI), and a host of others have PCI-Express flash drives that are used as accelerators alongside hard disk drives in datacenters. These are typically high capacity drives and use quite a bit of flash.

Consolidation In The DRAM Space

Another recent positive development for Micron was the acquisition of the bankrupt memory maker, Elpida. The DRAM space has become a battleground of cuttroat margins. However, the fab infrastructure required to manufacture DRAM is expensive, so very few can actually compete in this space. With Elpida eliminated as a competitor and its infrastructure absorbed by Micron, the latter company will benefit from seeing its market share doubled from roughly 12-13% to 22-23%, making it one of only three competitors in the space left (the other two are Hynix and Samsung).

Prices on current DDR3 should stabilize thanks to this development, and I expect with the rollout of DDR4 in the 2014-2015 timeframe, prices on DRAM should be higher and the margins should be better for all involved parties. The shift from local computing to cloud computing should also lead to greater sales of higher density memory modules for data center use, which should mean additional margin for the memory manufacturers.

Conclusion

Micron has had a nice run over the last month or so, but it seems that the semiconductor companies are starting to be favored once again. Look for a broad pullback before entering into a position in this company. Further, the stock is fairly volatile (beta of 1.28), so I recommend scaling into this position in small-ish lots.

Source: Micron: Why This Part Of The Computing Puzzle Is Crucial

Additional disclosure: I may initiate a long position in MU within the next 72 hours.