Shares of American multinational semiconductor company Micron Technology (NASDAQ:MU) popped 10% last week, after the company’s quarterly results beat the Street consensus. The company announced a 120% year-over-year increase in earnings, posting net income of $358 million, quite an improvement from $275 million net loss announced in the first quarter in 2013.
Even after the amazing stock rally, Micron may still have plenty of room left for growth. In the past two years, despite facing strong competition in the memory industry, Micron has managed to increase its year-over-year earnings per share figure in each and every quarter. A research focus, combined with scale advantages obtained from the recent acquisition of a Japanese semiconductor company, Elpida Memory, allowed the company to improve its economic moat in the past two years. Is Micron on its way to beat competitors such as Samsung Electronics (NASDAQOTH:SSNLF) and SanDisk (UNKNOWN:SNDK.DL), and conquer the memory market?
A diversified portfolio of memory products
Micron manufactures a diversified portfolio of memory products. The company has exposure to the DRAM segment, NAND flash memory market, and NOR flash technology. NOR and NAND technology are preferred for flash devices, while DRAM is the most common memory for personal computers.
DRAM business unit is booming
The company’s record revenues of over $4 billion were primarily driven by a 69% increase in revenues from the DRAM business unit, which also saw an improvement of over seven percentage points in gross margin. This unit is expected to continue growing, as Micron benefits from a completes integration of Elpida, which was acquired for $2.5 billion in mid-2013. Micron also benefited from a rise in the price of chips, driven by customers’ concerns about memory supply shortage.
Elpida’s acquisition at bargain price was a great move
The acquisition of Elpida helped Micron to improve its economies of scale. Moreover, the company won’t have to deploy large amounts of capital to build new fabrication facilities. Instead, Micron can take advantage of Elpida’s 300mm DRAM fabrication unit in Japan.
If things go north, Micron won’t have problem in continuing supplying Elpida’s clients — like Apple — with memory. According to IDC Corporation, Elpida’s acquisition helped Micron to roughly double its share of the global market for DRAM. Combined, both companies could control 28% of the market, only second to Samsung.
The best part of the story is that Micron acquired Elpida at a bargain price. When the company first considered buying Elpida in 2009, the chip market was pretty weak. Combined with the effects of yen appreciation, this forced Elpida to file for bankruptcy in 2012. As a result, Micron managed to get a very good price for Elpida’s inventory. However, just when the deal came to closing, chip prices started to improve, lifting the value of Elpida’s assets. Furthermore, the yen started depreciating quite quickly, improving Micron Technology’s return on investment.
The future is NAND technology
As Morningstar analyst Peter Wahlstrom points out, NAND memories may represent Micron’s most promising avenue for future growth. Demand for NAND memories — particularly solid state drives (SSD) –is expected to rise enormously in the next decade, as megacomputing trends — such as big data, analytics, cloud and mobile computing– push the demand for faster, compact, more reliable, and more compact memory.
Samsung is a first mover here. In 2013, the Korean giant introduced the world’s first SSD memory, based on proprietary 3D NAND technology. Samsung’s product offered a performance increase, and over 40 percent improvement in power consumption. SanDisk is also an important player in this field. To remain competitive against giant Samsung, SanDisk uses a vertical business model: it manufactures NAND memories through a joint venture with Toshiba, and it also generates revenue from its property and patents portfolio via licenses and royalties.
Final Foolish takeaway
Micron’s memory portfolio covers every segment of the industry. The DRAM business unit provides the company with strong and stable cash flow, which Micron uses to invest in NAND technology. For example, the company is building an early pilot line for 3-D NAND memories. The recent acquisition of Elpida at bargain price, an increasing demand for NAND technology, and economies of scale should help Micron to capture more market share in the memory industry.