The news feed on my Facebook (FB, Financial)Â page for the last two days has been constantly featuring some story that revolves around the launch of iPhone 6 and iPhone 6 plus by Apple (AAPL, Financial). However, this is not an article on Apple but about a company that will have visible implications of the launch of these phones as well as the iWatch. I am talking about Micron Technology (MU, Financial), which has been on a high due to tightening scenario in the DRAM markets along with a robust outlook in the NAND supply. Let us analyse if the stock is a good bet after the release of iPhones by Apple.
A class performer
Micron has been a consistent performer in the recent past and its impressive revenue growth highly exceeded the industry average of approximately 10.4%. As a result of a sturdy topline growth, the company’s bottomline has also shown phenomenal growth. In the third quarter itself, the earnings per diluted share came in at $0.68 which is a boost of around 11.5% on a sequential basis. As a result of this strong performance, the stock has catapulted approximately 147.8% over the past year and whether explicit or not, there is scepticism among investors regarding the maintenance of a similar momentum.
A stir in DRAM supply
Quite recently, a report from DRAMeXchange highlighted the threat that the DRAM market oligopoly might face in the near future, owing to an increase in capacity by major manufacturers. As per the report, an increasing number of DRAM manufacturers are planning to expand their capacity in the fourth quarter of 2014 as DRAM market supply tightens, while bit supply could grow by nearly 30% next year following recent decreases in die size and adjustments of capacity. As a result, the industry’s oligopoly structure could face considerable challenges in 2015, among them oversupply that would eat into producers’ profit margins. This definitely implies considerable fear for investors as the company heavily relies on its DRAM sales which contributes nearly 90% to its margins. In fact, the launch of iPhones was being touted as one of the significant events in 2014 because Apple is one of the Micron’s biggest customers.
As per the reports that came in prior to the announcement of the iPhones, a good number of analysts put a buy rating on Micron due to the expectation that iPhone 6 would have 2GB DRAM as compared to the 1GB DRAM that have graced all previous versions of the phone. However, an analysis of Apple’s A8 SoC which powers both the iPhones and leaked Geekbench scores reveals that the smartphone giant might have stacked just 1GB of DRAM in alignment with the previous versions of the phone. Though it is not justified to make confirmed comments on the hardware specs till a complete analysis happens when the phones are available on September 19th yet, it might be prudent for investors to keep a check on their expectations.
Why is there no need to panic?
Now, getting back to the rocky demand-supply situation facing the DRAM industry, it is to be noted that these small developments are quite insignificant. Yes, they are insignificant not because they are small but because DRAM wafers are not like the commonly used perishable products or products that are reasonably elastic in demand. As for now, Samsung is the only player in the industry that has announced that it will reserve major portions of its S3 plant’s capacity for DRAM production and is currently in the process of deploying the necessary equipment and materials. The South Korean electronics giant will likely begin manufacturing DRAM wafers by the end of 2014, and is expected to focus on PC DRAM. In the second half of 2015, Samsung's maximum S3 DRAM capacity is forecast to reach 60,000 per a month.
Though the news dictates that the other big players in the industry i.e Micron and SK Hynix are also gearing up to hike their capacity in response to Samsung’s announcement, the investors should not panic on the thought of oversupply. This is because the industry players increase their wafer capacity in order to offset the wafer loss from process node shrinks. In a way, the increase in capacity is a form of replenishing for the loss of wafers due to a process consequence in order to keep supplying wafers as per the demand. Now because Micron expects a low single-digit growth in DRAM demand, the supply has to be computed to compensate for the wafer loss as well as support the increase in demand.
Takeaway
In conclusion, I would like to admit that the situation in the DRAM industry is clearly unambiguous and therefore, investors are wary of putting their money in the stock. However, the Street should acknowledge the fact that Micron is one of the biggest players in the DRAM market and its acquisition of Elpida has given it the much needed production capacity along with access to a client like Apple. Additionally, the Average Selling Price (ASP) is poised to increase in the second half of 2014 because of better PC DRAM pricing. Thus, investors should not be highly worried about implications of DRAM demand and supply scenario on Micron.
