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Micron To Profit From New Memory Environment

Jaret Wilson profile picture
Jaret Wilson

After decades of failures and consolidation in the memory industry, few participants remain, with the playing field shrinking from 40 to 50 a couple of decades ago to just 3 to 4 significant players now. Despite this, the revenue and range of products from DRAM, NAND, and NOR is greater than ever, and the few surviving combatants in this battle royal stand to finally make sustained and significant profits which should result in multiple expansion, similar to what has been observed in hard-drives with Seagate (STX) and Western Digital (WDC). Micron (NASDAQ:MU) in particular stands to benefit, as it has been looting the battlefield as its foes have fallen.

DRAM is volatile memory, the thinking memory of your phone, tablet, computer, gaming system, car, or other electronic device. It's produced by Samsung, SK Hynix, Micron, and Elpida, with some minor players taking a couple of percent of the market. NAND flash (and the less common NOR, which is quickly being replaced with NAND) is non-volatile memory, the long-term storage of your electronic device. It's produced by Samsung, SK Hynix, Micron, and the partnership of Toshiba/SanDisk (SNDK). Samsung, SK Hynix, and Micron periodically shift production back and forth between DRAM and NAND to match market demands.

The most recent and remarkable casualty in the memory market was Elpida, which filed for bankruptcy in 2012. Micron and Hynix both bid for the company, and Micron won at 200 billion yen (about $2.5 billion at the time, a steal considering the $6 - $8 billion replacement cost of the facilities.) The yen has since depreciated dramatically vs. the dollar which has had the dual effect of making Elpida's production cheaper and the purchase price less expensive at just $2 billion today.

Unfortunately, Micron will not enjoy the benefit of about half of the improvement

This article was written by

Jaret Wilson profile picture
Jaret Wilson is the author of the behavioral economics book "Rational Thinking and Investing." He also manages a hedge fund with a value investing philosophy and a focus on technology.

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Comments (14)

Really appreciate your article and thoughtful analysis. Something I do not know how to judge is how much the Steve L & SAC situation is playing a role in the recent stock drop. Your article is encouraging to adding to an existing position; the SAC stock holdings give reason for a pause in finding the bottom of this stock price decline. That being said, you provide good reasons for more MU growth.
Jaret Wilson profile picture
danbre, it's certainly possible that there's been some extra liquidation due to the Steve Cohen/SAC mess.

Certainly there's some nervousness from drops in DRAM spot price too. The decline from the high looks dramatic on the dramexchange DXI graph, but the funny thing is that it's maybe a 6% decline. March-May there was also a mild decline, and that was followed by a vertical spike. Back to school and Christmas shopping are upcoming along with some refreshes in the product cycle like the next iPhone.

Another issue is that some analysts (for instance at Morgan Stanley) have imagined capacity expansion that isn't really there. A lot of capital spending going on is just part of the normal upgrade cycle and process shrinks, and doesn't keep up with expected increases in demand.

I think there will be some surprising numbers over the next couple quarters.
From the recent movement of $MU, apparently people want to sell the stock. Supply is larger than demand and stock price is keep dropping. Fundamental analysis may be right and it shows a great future for $MU, but the market does not accept it at least now. The Micron Elpida deal is not a news anymore and may be over consumed. Keep alert.
Jaret Wilson profile picture
Thanks icamber. I believe the weakness in IMOS is an overreaction to some rumors regarding the LCD driver industry which is strong in the aggregate, but has temporary pockets of weakness. For instance, high-end smartphones have been selling less well than expected, but low- and mid- tier phones have been doing better than expected in China and elsewhere in the developing world. I intend to write more about both MU and IMOS in the near future.
The Reluctant Fundamentalist profile picture
Awesome first article. Well researched and even better articulated. I too am looking at IMOS for the last month and a half and I don't understand the drop in price either. It appears a great buy in but I need to understand why first.
Retired Securities Attorney profile picture
Great job, Jaret.
Russ Fischer profile picture
Where have you been?! A very good article!
Jaret Wilson profile picture
Thanks Russ. I've been enjoying your articles for some time now. Looking forward to reading and writing more in the future.
Caffeine profile picture
Jaret, awesome article. As being a long term holder of imos and been comparing notes with you the last couple of years I have come to the conclusion that you are very conservative in your commentary. Well thought out Article and should be very informing to others that don't understand the combined companies powerful prospects. Great work again.
Jaret Wilson profile picture
Thanks Caffeine. I did indeed try to be conservative. I think there's potential for significantly more than stated here given the long term supply/demand situation in memory. ...awesome job by the way at consistently making great picks and then sticking with them until fair value is reached.
C Michael Croston profile picture
Great info. Thank you!
Just Myself profile picture
Hey Jaret, Congratulations on your first SA article.

I am confused by the latest change in market news from tight memory to the current 5% drop in DRAM pricing and a slowdown in consumption. I just don't know how to foresee the future.

The MU acquistion of Elpida has been known but is now reported just today to close sooner than later (31-July). But, the acquistion is known and was supposed to be positive yet MU has dropped. Is the Steve Cohen liquidation affecting this (and Wall Street acting on this knowledge)?

I have a smaller position in IMOS and was going to buy more until the share price weakened. Until I really understand this, I am not adding. You should make your second article on IMOS to help explain the current weakness and the pending Taiwan listing.

Congratulations again on your first article!!!
Since the Micron positive outlook has been 'on the air' for some time now, including in SA from various articles, what will be the new unknown unknown to move the needle on Micron stock price.

I feel that the undiscovered gems may well be those users of these chips to make storage 'systems' that are increasingly used not in smartphones (whose prospects have largely been 'discovered' for some years now) but in servers, network gear, medical systems, automotive systems, etc etc.

I don't know a single company that I could recommend, but do you know of any.....and by the way, if Intel can move away from planar to 3D for CPUs, why are these guys not moving to 3D as well....the cost and performance benefits would seem very obvious.
Jaret Wilson profile picture
alpine, I think the new unknown is simply the numbers. At this point people see plenty of speculation, but they are used to years of red ink. Once profits start actually arriving and analysts make long-overdue revisions to their estimates everything will change. It will be interesting to see what Micron reveals to us on July 31.

Regarding 3D NAND, Micron is actually planning to gradually migrate into 3D pretty soon, much sooner than SanDisk for instance. However, it's a complex technology and will greatly decrease yields in the beginning, so it won't have a real effect on supply for a while. That's a good thing. Prices should stay up.

My undiscovered gem that's related to that is IMOS which I mentioned in the article and will be writing more on soon. They test and package a variety of chips, and in the field of LCD drivers and other things such as fingerprint readers, are one of only 2 companies in the world to do the bumping for the chips.
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