- Micron’s future earnings model is dependent on demand continuing to outpace supply. Production abilities also influence the revenue growth along with the market demand.
- Outward forecasts dictate a growing mobile market will fuel demand for NAND technology. Mobile device production will outpace PC production growth.
- Competition is fierce in the sector. The company needs to maintain and expand its revenue share or become irrelevant.
- The stability and cost effectiveness of NAND technology makes the product more attractive to device producers. It is also faster than the spin-based DRAM technology.
Micron Technology Inc (NASDAQ:MU), the manufacturer of DRAM has always seen a demand in excess of supply, since 2013 Q3. This demand-supply divergence shrank in 2014 Q1, however post that the gap has only widened and has seen the widest divergence ever. DRAM continues to show strong demand that is growing at record paces.
NAND is quickly closing the demand gap and it offers advantages to DRAM. DRAM is more volatile and requires a constant power source to prevent data loss. NAND is not as durable as DRAM and its integrity lessens with each use. There are only so many times you can write over it before it begins to lose efficiency. PCs and other hardware prefer DRAM for these reasons.
Despite the higher production costs, PC’s experience a longer lifecycle and thus need a more reliable long term memory solution. Power sources are not as much of a concern with these units as they are plugged directly into sources and also adequately backed up.
NAND is practical for mobile devices mainly because it allows for larger capacity in a smaller unit. It also is cheaper to produce, which fits into the production costs models for mobile device manufacturers. The life cycles of mobile devices are much shorter than their counter-parts. The shorter lifespan is more compatible with the devices lifespan. Power failures and disruptions are more common in mobile devices making NAND a better option there.
The average mobile device has a lifespan of only 18 months. The average age of a PC before it is replaced is 4.5 years.
Both have advantages that make their long-term viability in the chip marketplace a strong possibility. But as the mobile device marketplace begins to outpace all others, the supply and demand of NAND chips, and the company’s ability to capitalize on it, becomes more critical to Micron’s revenue outlook. (To know more about Micron, watch Amigobulls' video on Micron stock analysis)
Since 2010 PC shipments have stagnated and future modeling dictates that will not change. Tablet shipments have expanded but nowhere near the past and future growth for cell phones. This further indicates NAND technology will be critical to the revenue stream of chip makers such as Micron.
Micron Revenue Breakdown
To see Micron's latest earnings analysis, read Micron Earnings Analysis for Q1 2015
Micron Technology has three main competitors in the chip producing industry; Samsung Electronics, SanDisk (NASDAQ:SNDK) & SK Hynix Inc. While they all present formidable competition, Micron should be most concerned with Samsung. Samsung wields a double-edged sword as it is a producer and consumer of DRAM and NAND chips. In the past, during times of short supply, Samsung had to contract Micron & SK Hynix to supply chips for their smartphones.
This could be manipulated by Samsung to effectively “squeeze” the marketplace. In a sense, they can control the demand side of the issue. In conditions of an excess of chip inventory they could effectively liquidate it to their phone division by increasing production. Samsung could also manipulate pricing by transferring margins from their smartphone division to their chip making unit.
Samsung is also a larger company with more potent resources. They have the ability to sustain their chip-making unit via other units, such as the smartphone division. Samsung has already developed a cutting-edge 3-D NAND chip and it is about to release it in the second half of 2015. Micron has teamed with Intel and is working on the technology but Samsung has the edge at this stage.
Micron Revenue Model
Assumptions of revenue for a three quarter period are as follows:
While their largest competitor does have certain competitive edges that Micron will never be able to match, there is a potential avenue for them to capitalize on and control a larger market share. That avenue is the NAND technology.
NAND technology is beginning to penetrate the enterprise segment. Solid State Drives – which utilize NAND flash technology - are becoming more acceptable in the industry. Storage infrastructures were once dominated by spinning-drive and DRAM technology. As the versatility of NAND becomes more evident this expansion will continue, creating revenue opportunities.
DRAM supply is consistently higher than demand and until NAND takes hold, this should continue. This will shield the industry from inefficient pricing scenarios such as that during 2013 where a glut in the supply caused producers to sell the chips below production costs. A stable market is beneficial to all players. The real opportunity for expanding growth beyond expectations lies within the NAND technology.
Demand for NAND technology is expected to grow at a CAGR of 38% during the period of 2014-2018. Supply is projected to grow at a CAGR of 31%. DRAM is projected to grow at a CAGR of 25%. Supply for the technology is predicted to grow at a CAGR of 21%.
The expansion of NAND in the sector also reduces the demand for DRAM.This will soften the supply pressure on DRAM and create inventory liquidity. The winner in this competition for market share will be the company that is able to capitalize on this shift in technology.