Micron Technology (NASDAQ:MU) is a manufacturer and marketer of memory products, primarily dynamic random access memory (DRAM) for PCs and mobile devices, NAND Flash and NOR Flash memory products. Micron derives 40% of its revenue from DRAM, and we estimate the division to contribute over 51% to its valuation. DRAM is a memory product that stores data inside a computer for short periods of time while the device has power. Micron develops different types of DRAM including mobile DRAM products that are specialty DRAM memory devices designed for applications demanding minimal power consumption such as smartphones and tablets.
The slowdown in PC shipments, combined with intense competition and macro headwinds, has put the DRAM market in oversupply. The demand-supply mismatch has further pressurized selling prices, eroding Micron’s gross margins for the DRAM business. Though the global DRAM shipments continue to increase, the growth rate has slowed on account of the above mentioned factors.
While PCs continue to account for a significant proportion of total shipment, Micron’s share in the DRAM market has been declining. On the other hand, smartphones and tablets are starting to account for an increasing proportion of DRAM sales. Considering the growing popularity of smartphones and tablets, we expect mobile devices to account for a higher proportion of DRAM sales in the future and estimate the rapid growth in mobile devices to accelerate DRAM shipments despite a slowdown in the PC market.
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The rapid growth of mobile devices combined with increasing DRAM usage will drive overall DRAM shipments from 29.3 billion in 2012 to 334 billion by 2019. Given Micron’s acquisition of Elpida, a semiconductor DRAM memory manufacturer, in June 2012, Micron is expected to benefit from this growing trend. Below we discuss the potential growth in the DRAM market and highlight the benefits of Micron’s acquisition of Elpida.
What is DRAM? What is the proportion of different products in the DRAM market?
DRAM is a memory product that stores data inside a computer or laptop while the device has power. We can think of DRAM as a short-term memory that computing devices require for executing programs. Micron develops different technologies of DRAM – SDRAM, DDR, DDR2, DDR3- for use in PCs, networking devices, servers, consumer electronics and other communications equipment. It also develops mobile DRAM products that are specialty DRAM memory devices designed for applications that require minimal power consumption such as smart phones, 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.  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. 
The semiconductor industry is undergoing a shift with tablets and smartphones replacing PCs as the growth engine of the semiconductor industry. We believe that the rapid increase in mobile devices will help fuel growth in DRAM shipments in the future. Research firm iSuppli forecasts the combined share of mobile handsets and tablets in the DRAM market to reach 26.7% by the end of 2013, almost double from 14.1% in Q1 2012. 
Increasing mobile DRAM Content in Smartphones and Tablets Will Further Drive Demand
In addition to increasing mobile device shipments in the future, higher memory content (more DRAM bits being loaded onto the devices) will also contribute to growth in DRAM shipments. For example, the third-generation new iPad has double the DRAM content of its predecessor.
As per iSuppli, the average DRAM content per smartphone increased to 5.1 Gb in 2012 compared to 3.5 Gb and 2.3 Gb in 2011 and 2010, respectively. DRAM content per tablet was estimated to reach 8 Gb by 2012, a significant increase from 4.5 Gb and 2.3 Gb in 2011 and 2010, respectively. 
We forecast the global DRAM shipments to increase to 334 billion units by 2019 from the current level of 20 billion units. Apart from shipments and content growth in smartphones and tablets, other applications of mobile DRAM – portable media players, DSC and portable GPS navigation systems – will contribute to higher DRAM shipments as they witness faster memory content growth in the future.
Elpida Acquisition Will Expand Micron’s Mobile DRAM Portfolio
Micron expects to complete Elpida’s acquisition by mid-2013. While Micron is the leader in enterprise DRAM solutions for networking and servers, Elpida has a strong presence in mobile DRAM. Micron currently generates less than 10% of its revenue from mobile DRAM. However, with access to Elpida’s manufacturing capabilities and intellectual properties, we expect the proportion to increase in the future.
In addition to a higher market share, Micron will have the added advantage of supplying chips to Apple (NASDAQ:AAPL), which could further boost its DRAM shipments. Last year Apple placed a new order for DRAM chips with Elpida, cutting its reliance on rival Samsung for component supplies.
Though the slowdown in PC shipments has impacted demand for DRAM products, the increasing popularity of smartphones and tablets will fuel future growth in DRAM shipments. In addition to increasing contribution of mobile devices in DRAM shipments, we expect the growing DRAM content in these devices to drive demand for DRAM products.
With Elpida on board, we feel Micron will be better equipped to leverage potential growth in the DRAM market. Micron targets to complete the acquisition by the first half of 2013.
Our price estimate of $6.53 for Micron Technology is at a slight discount to the current market price.
- Sign of the Times: PC Share of DRAM Market Dips Below 50 Percent for First Time, iSuppli, September 14, 2012 [↩] [↩]
- Mobile DRAM Revenue Hits Record High in Q2, iSuppli, October 17, 2012 [↩]
- DRAM Market’s Woes Are Over in 2012, Courtesy of Elpida Bankruptcy, iSuppli, May 15, 2012 [↩]