Over the past few months, Micron’s (MU) stock price has experienced considerable volatility owing to the turbulent demand-supply in the DRAM industry. Major players in the DRAM industry including Micron, Samsun and SK Hynix have already come out with their next gen product DDR4 SDRAM which is, in the sense of term, evolutionary. DDR4 enhances system-level capacity and performance scalability and at the same time consumes quite less power in comparison to the previous version – i.e., DDR3. Thus, it is not difficult to infer that the DRAM markets will see significant competitor activity in the coming times and Samsung’s recent announcement to convert its Hwaseong facility to DRAM production signals strengthening supply in the market.
DRAM is the growth getter
The president of Micron, Mr. Mark Adams, indicated that Samsung’s announcement to convert a single facility does not necessarily imply an increase in DRAM demand. Rather, it is a validation of what Micron has been saying for long time – i.e., no one is going to go out and line up a whole new factory. Keeping the announcement from Samsung aside, it is significant to note that Micron itself expects a 25% CAGR growth in DRAM industry whereas the supply is expected to grow at 21% during the next four years. Thus, this imbalance between demand and supply growth will lead to an improvement in the average selling prices of DRAM chips and overall margins.
In the last year, Micron famously acquired Elpida (now known as Micron Memory Japan) for $2.5 billion, which escalated the semiconductor giant to a dominant position in the DRAM sphere. One of the biggest benefits of this acquisition was the addition of Apple to Micron’s customer book. Currently Apple uses DDR3 modules in all of its high performance PC and mobile devices but considering the power efficiency and system capability offered by the DDR4 module, Apple might incorporate DDR4 in order to power its mobile devices. Even though there is no certainty over the use of DDR4 chips by Apple, one thing for sure is that the smart devices giant is going to come out with its next iPhone product quite soon.
To conclude on the DRAM industry, it can be said that Samsung’s announcement definitely indicates some supply shortage in the markets. Also, the growth in the smartphone market, long aided by big releases in the second half of the year, will expand demand for mobile DRAM chips. In such a case, it is not reasonable to expect that the average selling prices might go down if all the conglomerates of this industry hike up their capacity. On the contrary, the selling prices might stabilize if there is a coordinated increase in the industry supply.
NAND is another pillar
Micron expects industry NAND bit demand to grow at a CAGR of 38% over the 2014-2018 period, while the supply is expected to grow at a CAGR of 31% over the same time frame. In this case as well, the imbalance existing in the demand-supply scenario will prove to be a boon to the company. In fact, rising global mobile shipments and increasing demand for Solid State Drives (SSDs) are the most important trends driving current demand for NAND Flash products. SSD is a flash memory-based device, which is increasingly gaining popularity in embedded systems and laptops due to its low energy consumption and durability.
Micron’s main focus is on growing its own (Micron-branded) SSD business in the future. The company sells Micron-branded SSDs, as well as components to third-party manufacturers of SSDs, which together represent around 45% of Micron’s NAND business (the smartphone module market is about 10% of its NAND business). The NAND Flash Memory segment accounts for approximately 30% of Micron’s total valuation as per estimates, making it an important growth driver for Micron. Micron’s SSD business ranges from hard disk drive replacements with SSDs for clients to enterprise-class storage solutions. The Micron-branded SSD revenue increased 76% in 2013, and more than 50% of the trade NAND revenue went to either Micron-branded SSDs or to the strategic customers who serve the SSD category with Micron’s NAND technology. Micron firmly believes that the biggest focus within its NAND group today is growing a large and viable enterprise offering, which at present accounts for less than 5% of its NAND business.
The increasing demand in the global smartphone market coupled with stabilizing PC demand are catalysts for Micron’s growth. Trading at a forward multiple of around 8.9 as compared to industry’s average of 10.3 suggests that the stock is available for cheap now and for the opportunities lying ahead, it is worth the pay.