Micron: Good Medium to Long Term Growth Prospects

By Ashish Sharma - August 9, 2012 | Tickers: AAPL, MU, SNDK | 0 Comments

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Compared to its peers in the DRAM industry, Micron Technology (NASDAQ: MU) has a very healthy balance sheet with almost zero net debt. We believe that Micron is executing well in a consolidating memory industry with good products, end market, and customer diversification. We expect improving demand and stable pricing for DRAM and NAND flash in 2H12 and hence remain bullish on MU.

MU Better Positioned than Sandisk in SSD

We believe that MU is better positioned than Sandisk (NASDAQ: SNDK) in SSD as it focuses on PCIe SSD whereas Sandisk is largely focused on SAS-SSD. We expect that SSD with PCIe interface will see a faster adoption rate over SAS-SSD in the enterprise market as PCIe is the fastest physical interface available in PC/Server.  We are also increasingly positive on MU as it has the ability to offer combined DRAM and NAND products in the future contrary to SNDK. We believe that the next breakthrough in high-performance-caching would occur with combinations of DRAM and NAND made available through the system memory bus, which represents the fastest connectivity interface available in a computer system. As Micron manufactures both DRAM and NAND in-house, we believe Micron has an inherent advantage over SanDisk which manufactures NAND only.

Implications of Elpida Acquisition

With the acquisition of Elpida, Micron will look to strengthen its product portfolio. Though the product mix post the closure would be still more DRAM biased, we believe that Micron can streamline its production (NAND versus DRAM, as well as within DRAM, such as commodity, specialty, mobile, etc.), thereby ensuring that its product mix is adequately optimized for demand (without adding excess capacity, thereby conserving CAPEX). This acquisition will also enable Micron to make significant inroads in the high growth mobile DRAM segment, where Elpida has a 30-35% share with key customers such as Apple (NASDAQ: AAPL). The combined Micron and Elpida entity will offer a broad base of memory products with an overall memory market share second only to Samsung. As Apple might be reluctant to give business to its rival Samsung, we believe that MU could see a high demand coming from Apple in the future.

Furthermore, Elpida’s greater scale gives it a cost per bit that is comparable to Micron, even though Micron has a cost advantage on testing due to in-house capabilities. We believe that Micron’s DRAM margins could benefit going forward from the greater scale of Elpida and the introduction of Micron’s testing flow to Elpida’s back-end process.

Toshiba NAND Production Cut

Toshiba recently announced that they will be cutting NAND production by 30% starting July 24. We believe that this step will be an overall positive for the supply/demand balance which has faltered with the oversupply of NAND flash. This announcement might mark the end of NAND price decline as the inventory reduces in the market. As the technological advancements slow down and GB/Wafer capacity growth ends, we expect to see an increasing gap between supply and demand going forward; which will be helpful to MU as it will lead to improved pricing and hence increased margins.

To conclude, Micron looks to perform well in both the NAND and DRAM segments in the near term. With SanDisk lowering its 2013 NAND bit supply growth guidance to 40%-50% from 50%-60% and Toshiba cutting the production by 30%, NAND pricing environment will benefit significantly. As DRAM pricing improved in 2012 with Elpida’s bankruptcy and many capacities going offline, we expect MU to operate at high margins. As we believe that Micron offers an attractive risk/reward profile to investors with its low valuation, we rate it as a buy.

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