The shares of Micron (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. While there were various reasons behind the exceptional performance of the company, the primary driver of the same was a credible improvement in the demand for DRAM memory. The fire at SK Hynix in 2013 also contributed to a shift in the demand-supply scenario in the industry and a sustained increase in the Average Selling Price (ASP) of DRAM chips that benefitted the entire industry.
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 (SSNLF) have gained immensely. It is worthwhile to note that the company makes approximately 70% of its revenue from DRAM segment of which around 30% is generated from sale of mobile DRAM.
Biting the Apple
Among others, one of the biggest clients of Micron includes Apple (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 rumoured that Apple is poised to launch iPhone 6 in 2014 with a score of new features and this could translate into a massive opportunity for Micron. I think, a peep into the history of Micron’s deal with Apple would offer some help to understand the potential gain that the investors of Micron can expect in future years.
Micron bagged Apple’s account for managing the entire supply of mobile DRAM chips after the company brought Elpida on board in 2013. Elpida was an ailing unit back then and Micron made a highly strategic move in acquiring Elpida as it not only benefitted Micron but also Apple. 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.
A series of upgrades
Recently, the shares of Micron saw an upside movement essentially 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. As a result of consolidation that has already taken place, a major share of the DRAM markets has become concentrated in the hands of a few large players that include Micron, Sandisk (SNDK) and Samsung.
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 of Solid State Drives (SSD). As mentioned by the management, 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 manufactures of SSDs. 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 (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 launch of its new 88SS1083 PCI Express (PCIe) solid state drive (SSD) 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.
It is amply clear that in case of Micron, the industry elements are going in favour of the company and Micron is well-placed in the DRAM market to take leverage of these conditions. Also, the confidence exhibited by analysts in Micron’s stock will fuel optimism among investors and pump up the share price in the course of next few quarters.