- Intel's acquisition of Micron would give the former a full exposure to the prospects of 3D XPoint memory.
- But Intel would also be subject to Micron's volatile earnings.
- While there are upsides to the move, there are risks as well.
Intel Corporation (NASDAQ:INTC) and Micron (NASDAQ:MU) have been in business together for several years now, jointly developing NAND modules, and time and again we see speculative discussions about Intel’s prospective acquisition of Micron. After all, the latter is riddled by net debt of about $3.77 billion and could benefit from the former’s deep pockets. So in this article, let’s take a closer look at the positives and downsides of this potential buyout to get a better understanding of the matter from the perspective of shareholders.
- Let me start by saying that Intel has a separate reporting division for its NAND manufacturing JV with Micron, called Non-Volatile Memory Solutions. The thing here is that while Intel registered a revenue of $554 million in NVMS during its latest quarter, it also incurred an operating loss of $224 million for the segment over the same period. So the NAND manufacturing business/JV isn’t really profitable for Intel. The only bright spot for the NVMS business division is the 3D XPoint memory that both Intel and Micron have jointly developed. If XPoint becomes a hit, it has the potential to boost NVMS’ revenue manifold and stem its operating losses completely. Therefore, Intel’s acquisition of Micron would give the former, a full exposure to the profitability prospects of 3D XPoint memory.
- More to the point, this might actually be a great time for Intel to increase its exposure to the prospects of 3D XPoint memory. Only IBM has developed a competitive Non-Volatile Memory solution to counter Intel’s 3D XPoint. But apart from IBM, none of the major memory manufacturers -- such as Samsung SK Hynix -- have announced the development of a similar memory standard. So, due to the lack of market competition, Intel can probably price its 3D XPoint at decent markups, without having to worry about pricing pressure from competitors. The XPoint could become a highly profitable product for Intel for this very reason if everything goes according to the chipzilla’s plans.
- It’s also worth noting that the market for NVDIMM, the one in which Intel’s 3D XPoint operates, is expected to experience a phase of rapid growth over the coming years. The market segment is expected to grow from zero to $2 billion in size by 2019. And due to the lack of market competition, most of this growth could go to Intel’s NVMS business division and IBM. So Intel’s acquisition of Micron would be a great way for it to increase its exposure to this blockbuster projected growth.
- And lastly, Micron is trading at a low valuation of just 1.34x price-to-sales and 1.4x price-to-book. Its shares are down almost 60% since the highs they created in 2014. So its acquisition would actually be economical and low-priced for Intel, if we look at its revenue-centric valuation metrics. So the buyout would basically be a great way for the chipzilla to tap an explosive market, at a low price.
Granted that we’ve discussed only the rosy part so far. Now let’s also look at some of the challenges that Intel could face with its prospective acquisition of Micron.
- It's worth noting that the bulk of theoretical positives from the buyout of Micron are based on the success of 3D XPoint memory. What if it doesn’t succeed? Intel’s NAND losses would increase and its NVMS business division would hemorrhage cash at 2x the pace, with the acquisition of Micron. So the buyout could prove to be a disaster for Intel if 3D XPoint memory fails to deliver.
- I noted earlier that except for IBM, other memory makers aren’t working on NVDIMM memory solutions yet. The key word is “yet.” If Intel acquires Micron solely for the prospects of 3D XPoint memory, and a few months later Samsung or SK Hynix announce the launch of a similar product, the whole activity of buying out Micron would have been for nothing. With the commoditization of NVDIMM memory, Intel’s competitive advantage and pricing power would quickly fade, margins will come under pressure and its NVMS division may still continue to report losses.
- Also, one of the reasons why Micron trades at relatively lower valuations is because of the volatility in its business, finances and cash flows. I attached a chart below for reference. With the acquisition of Micron, Intel would be subject to this volatility and the stock may no longer be suitable for dividend growth portfolios. As a result, Intel may end up trading at lower multiples.
- It’s also worth noting that Micron sells chips to other OEMs such as Kingston as well. These OEMs are basically competitors of Intel in the NAND segment. For example, both Intel and Kingston sell SSDs. So there is clearly a conflict of interest. Once Intel acquires Micron, the latter may have to forego clients (and their revenue) that are its competitors in its NAND segment to stem this conflict of interest. This could lead to a lower return on investment.
- And lastly, the combined entity would end up having somewhere around 20-21% market share in the NAND segment, making it the second or third largest operator in the field. So the acquisition could trigger antitrust roadblocks. This could put a stop to any potential buyout of Micron.
Putting it all together
I like the prospects of 3D XPoint memory. It's reportedly 1000x faster than typical NAND memory and yet its cheaper than a DRAM module of similar density. But basing the entire acquisition of Micron on this alone, and expecting that competitors won’t catch-up going forward, may be a bit of a stretch. Sooner or later, Samsung and SK Hynix will enter the NVDIMM and put pressure on Xpoint. Therefore, I don’t think Intel should acquire Micron due to the aforementioned reasons.