Investors who are following the DRAM industry must be aware of the depression in prices, which have had a harsh effect on DRAM manufacturers. This decline in prices was due to the sluggish PC market. In the DRAM industry, SAMSUNG ELECT LTD(F) (NASDAQOTH:SSNLF), TOSHIBA CORP (NASDAQOTH:TOSBF)andMicron Technology, Inc. (NASDAQ:MU)are the key manufacturers.
In May, double data rate 2 (DDR2) memory prices dropped down below $2, while the manufacturing cost of DDR2 was in the range of $2.50 to $3.00. It appears that the falling DRAM price trend may be soon coming to an end. Industry consolidation has become a primary theme of the DRAM industry, and it seems to be the only strategy which can slow down the price declines. Micron is one of the more interesting investments in this space. The company is trying to cut production costs to battle ever-declining prices.
Micron overview
Micron Technology, Inc. (NASDAQ:MU) is one of the leading manufacturers of semiconductor devices. Its products include DRAM, SSD, DRAM and CMOS image-sensing chips. Micron’s results for the second quarter ended February 2013 included a net loss of $286 million, compared to a net loss of $275 million for the first quarter of 2013. However the company’s gross margin improved to 18%, up 6% over the previous quarter.
Sales of DRAM products improved in the second quarter and were 24% higher compared to the first quarter of 2013. Micron currently generates 10% of its revenue from mobile DRAM. Slow demand and stiff competition have resulted in the reduction of prices, which has impacted Micron’s bottom line. In the second quarter of 2013, due to an increase in NAND flash sales volume, Micron’s revenue from NAND flash products grew by 8% over the previous quarter.
Elpida and mobile DRAM
Micron Technology, Inc. (NASDAQ:MU) is now in the final stage to acquire Elpida, a leading mobile-DRAM manufacturer. This will make Micron the second-largest DRAM manufacturer after SAMSUNG ELECT LTD(F) (NASDAQOTH:SSNLF). Elpida has a strong presence in the mobile-DRAM market. Elpida supplies DRAM chips to Apple Inc. (NASDAQ:AAPL),which could boost Micron’s current DRAM market share. Elpida has a strong brand name in mobile DRAM while Micron provides enterprise DRAM solutions. Consolidation of these two products will strengthen Micron Technology, Inc. (NASDAQ:MU)’s memory market share. It is estimated that the acquisition will constitute a 45% increase in Micron’s total memory capacity.
Three key players (Samsung, Toshiba and Micron) cover 80% of the total DRAM market. SAMSUNG ELECT LTD(F) (NASDAQOTH:SSNLF) is the leader with a 39% market share, while Toshiba and Micron enjoy 27% and 14% share, respectively. One of Samsung’s manufacturing plants is located 30km away from the Korean border, from which it manufactures most of its NAND flash memory. Due to tension between North Korea and South Korea, if Samsung needs to shut down its manufacturing facilities ot will significantly impact the company’s quarterly earnings.
TOSHIBA CORP (NASDAQOTH:TOSBF) is plagued by the unreliable yen, which has severely impacted the top line. The recent depreciation in the yen can have a 7.8% impact on the company’s revenue. TOSHIBA CORP (NASDAQOTH:TOSBF) is the largest player in the HDD market, with an 11% market share. It manufactures a wide range of products from drives and laptop to radar systems. Due to high manufacturing costs, Toshiba cut down its SSD production.
The decline in the PC market and rapid increase of smartphones and tablets will provide a strong platform for the semiconductor industry to grow. Micron Technology, Inc. (NASDAQ:MU) is also investing in its manufacturing process to clamp down its operating expenses, which in turn will improve its bottom line.
Bottom line
Elpida will soon become the subsidiary of Micron, which will increase its DRAM market share. As a major player in mobile DRAM, this will also allow Micron to benefit from the rapid growth in handheld devices. The stock is trading pretty close to its mean sell side target price of $11.7 but growth in smartphone/tablets calls for higher valuations. Investors should consider Micron Technology, Inc. (NASDAQ:MU) a long term bet in the rapidly consolidating DRAM industry.
Red Chip has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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