Micron Benefits From Higher mDRAM Penetration

The declining PC shipments have lowered demand for DRAM memory products, a segment that accounts for over 40% of Micron Technology’s (NASDAQ:MU) valuation as per our estimate. The DRAM market is currently suffering from a demand-supply mismatch and declining selling prices, which has severely constrained industry profits. PCs have traditionally been the major buyers of DRAM, and a slowdown in the PC market has considerably impacted DRAM demand. However, with growing demand for mobile devices, mobile DRAM’s (mDRAM) contribution to total DRAM sales is rising at a fast pace. mDRAM is a low power DRAM product used in mobile applications.

Micron currently generates less than 10% of its revenue from mobile DRAM, but with the acquisition of Elpida almost complete, the proportion can significantly increase in the future as the latter has a strong presence in the mobile DRAM market. At $218 million, Elpida’s mDRAM revenue in Q2 2012 was almost double than that of Micron’s mDRAM revenue of $106 million. ^[1]

Elpida’s acquisition is set to significantly boost Micron’s installed capacity base. In addition to becoming the second largest DRAM manufacturer after Samsung (SSNLF), Micron will have the added advantage of supplying chips to Apple (NASDAQ:AAPL), which could further boost its mDRAM shipments.

See our complete analysis for Micron here

What Are The Factors Driving Demand For mDRAM?

DRAM is a memory product that stores data inside a computer or laptop while the device has power. One can think of it as a short term memory that computing devices require for executing programs. mDRAM products are specialty DRAM memory devices designed for applications that require minimal power consumption such as smartphones, GPS devices, tablets, as personal digital assistants and digital still cameras.

For over three decades PCs have accounted for more than 50% of the DRAM market. However, during Q2 2012, PCs share in global DRAM shipments stood at 49%, the first time since 1980 when it did not consume the majority of DRAM memory products. ^[2] On the contrary, mobile DRAM’s market share in total DRAM shipments increased from 7.9% in Q1 2012 to 17.8% in Q2 2012. ^[3]

Mobile DRAM revenue is estimated to have grown by 10% reaching $6.56 billion in 2012, compared to $5.98 billion in 2011. In comparison, the standard DRAM revenues grew by a mere 3% last year. ^[1]

Here are the factors driving demand for mDRAM products –

1. Growing mobile device shipments: The semiconductor industry is undergoing a shift with tablets and smartphones replacing PCs as the growth engine of the semiconductor industry. Global PC shipments witnessed the sharpest quarterly decline (13.9% y-o-y) in Q1 2013 in almost two decades and are forecast to decline for the second consecutive year in 2013.

On the contrary, smartphone shipments increased by 43% in 2012 ($675 million), accounting for nearly 40% of the mobile phone market. ^[4] Research firm IDC forecasts mobile phone shipments will climb to 2.2 billion units by 2016, and we estimate smartphones to account for 60% of the shipments. IDC estimates the global tablet shipments to have reached 117 million units in 2012, a 65% increase from 2011, and forecast the market to rise to over 260 million units by 2016. ^[5]

The combined share of mobile handsets and tablets in the DRAM market is estimated to reach 26.7% by the end of 2013, almost double from 14.1% in Q1 2012. ^[2]

2. Higher memory content in mobile devices: The mDRAM density in mobile devices are rising as mobile operating systems, streaming apps and games require more memory to handle sophisticated tasks. As per iSuppli, mobile DRAM density in a smartphone increased to 5.85 gigabits (Gb) in Q2 2012 from 2.28 Gb in Q2 2010. In tablets the mDRAM content grew faster, increasing from 2 Gb to 8.33 Gb during the same period. ^[1].

Elpida Will Help Increase Micron’s Penetration In mDRAM; Apple To Become An Important Customer

Micron announced its acquisition of Elpida for $2.5 billion in July 2012. Last month, the Tokyo High Court released an order dismissing appeals of Elpida’s unsecured creditors which places Micron a step closer to acquiring the company. The fab assets acquired from Elpida and Rexchip will increase Micron’s current manufacturing capacity by almost 50%. ^[6]

In 2012, Micron was at the fifth position in terms of installed capacity. After closing the Elpida deal, Micron will have the second largest installed capacity in the industry and become the second largest DRAM player in the market. Additionally, since Apple uses 80% of Elpida’s mobile DRAM production capacity, the acquisition will increase Micron’s exposure to Apple. ^[7]

Apple and Samsung are two of the leading players in the mobile device market and getting the former as its customer will be a huge win for Micron. Elpida currently supplies SDRAM for Apple iPhone 5. In June 2012, Apple placed a new order for DRAM chips with Elpida cutting its reliance on rival Samsung for component supplies. Elpida currently has 1,000 patents in its portfolio. If Micron is able to better leverage Elpida’s patent portfolio it can increase its business with Apple and other players, significantly accelerating its growth rate in the future.

Sources: Gartner & IDC Pres Releases

Our price estimate of $8.61 for Micron Technology is at a significant discount to the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Mobile DRAM Market Expands as Usage Increases in Smartphones and Tablets, iSuppli, August 7, 2012 [↩] [↩] [↩]
2. Sign of the Times: PC Share of DRAM Market Dips Below 50 Percent for First Time, iSuppli, September 14, 2012 [↩] [↩]
3. Mobile DRAM Revenue Hits Record High in Q2, iSuppli, October 17, 2012 [↩]
4. Gartner Says Worldwide Mobile Phone Sales Declined 1.7 Percent in 2012, Gartner Newsroom, February 13, 2013 [↩]
5. IDC Raises Its Worldwide Tablet Forecast on Continued Strong Demand and Forthcoming New Product Launches, IDC Press Release, September 19, 2012 [↩]
6. Micron and Elpida Announce Sponsor Agreement, Micron Press Release, July 2, 2012 [↩]
7. DRAM, NAND Flash prices rising amid supply shortage, Focus Taiwan, June 3, 2013 [↩]