Chipmaker about to Pop

A Chipmaker That's About to Pop

By Piyush Arora - May 13, 2013 | Tickers: MU, SSNLF, TOSBF | 9 Comments

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Anybody who is following the DRAM (Dynamic Random Access Memory) industry must be aware of the recent crash in DRAM prices, which wreaked havoc on most DRAM manufacturers. The crash was a result of falling PC sales, while ultrabooks failed to grow at the expected rate.
To counter the falling prices, DRAM manufacturers, including Toshiba (NASDAQOTH: TOSBF) and Samsung (NASDAQOTH: SSNLF), cut the production of their memory modules, which, coupled with recovering industry prospects, led to a 183% jump in DRAM prices. Since it’s an industry wide growth catalyst, almost all DRAM manufacturers stand to benefit here. But there are a few reasons why Micron Technology (NASDAQ: MU) seems well poised to outperform its mentioned peers.
Acquisition spree
To begin with, Micron Technology is one of the leading semiconductor device manufacturers around the world, which mainly produces NAND Flash, NOR Flash, and DRAM memory modules. The company reported annual sales of over $7.8 billion last year. But, the numbers are going to change soon!
According to its latest press releases, Micron Technology is in the final stages of acquiring Japanese chipmaker Elpida. The deal is being valued at around 200 billion Yen, which equates to nearly $2.01 billion. The good thing is, $1 USD currently equates to ¥99.5, up from $1 USD = ¥78.5 in September last year, which has effectively lowered the cost of Elpida’s acquisition by over 26%.
Elpida Memory is a leading DRAM memory manufacturer, and the acquisition is expected to boost the FY13 EPS of Micron Technology to a loss of $0.36, as compared to a loss of $0.54 in FY12. On the sales front, Elpida Memory is expected to add over $200 million in annual revenue, which should take Micron’s annual revenue to over $8 billion. Furthermore, the acquisition would boost Micron’s overall DRAM production by 50%.
Since DRAM module prices are rising again, while the Japanese Yen is depreciating, the acquisition should be massive value addition for Micron Technology.
Moving ahead in the race
On the competitive front, the production boost would put Micron Technology as the world’s second largest DRAM manufacturer. Samsung is currently enjoying a 39% market share, while Toshiba and Micron Technology operate with around 27% and 14% market share.
But, I believe that Samsung’s massive market share could be jeopardized by the tensions in North Korea. Its head office and one of its main manufacturing facilities are located close the Korean border (30 miles away), and authorities of both the North and Southern nationalities are reportedly shutting down businesses in the area to avoid needless civilian casualties.
Even if there’s a minor disruption in Samsung’s production, it’s a good possibility that global prices of NAND and DRAM modules could increase significantly. Since Micron Technology is isolated from the troubled region, it would naturally stand to benefit from the rising prices, and would have the opportunity to gain a greater market share.
Even Toshiba stands to benefit here. The company has been producing memory modules with a 19nm fabrication process for over a year now, while Samsung and Micron still use the 20nm process. Although it currently has a slight competitive advantage, the market for enterprise solutions still requires 20nm fabricated chips, which is largely dominated by Micron Technology. But, that doesn’t imply that Toshiba won’t benefit from a plunge in North Korean output.
Wrap up
I believe that Toshiba is a fine company, and is in a turnaround with competitive consumer products at highly competitive prices. But, the world’s second largest chipmaker is struggling with depreciating Yen, which has inflated the domestic prices of consumer electronics and reduced the market demand. This is one of the main reasons behind Toshiba’s massive revenue drop of 7.80% in the recent quarter. The company generates around 45% of its revenue (memory segment) from Japan, and the depreciating Yen would continue to hurt Toshiba’s top line.
Naturally, the war-like situation in North and South Korea would lead to currency depreciation. But, since Samsung generates the bulk of its revenue from international shipments, I believe the forex gains on its consumer electronics shipments could offset a part of the potential revenue drop in its memory division.
With that said, I think Micron Technology is a great company and deserves a buy rating, due to all the mentioned reasons.

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