Is NAND Going the DRAM Way?

NAND flash memory is enjoying tremendous popularity, as the chip is used in a wide variety of devices such as cameras, smartphones, tablets, and even high-performance notebooks. However, there are concerns that NAND flash is becoming a victim of its own success, like DRAM.

Intel says goodbye
Intel
(Nasdaq: INTC  ) recently created a stir when it sold two of its NAND flash manufacturing facilities to Micron Technology (Nasdaq: MU  ) . Intel will sell its two NAND chip factories for about $600 million, half in cash and half as advance against future purchases. What's the big idea?

Well, Intel is supposed to be aggressively expanding into the SSD market, and most SSDs use NAND-based flash memory. So why would it get rid of manufacturing capacity when it's needed the most? The fact is, NAND prices are falling and Intel is keen on exiting before margins become too low.

But, while there is a possibility of falling margins for NAND manufacturers, I don't think this decline will be anything close to DRAM proportions.

NAND vs. DRAM
DRAM prices have fallen due to a number of factors common to the chip industry. But the difference is that oversupply of DRAM chips in the market was worsened due to the worldwide decline in PC shipments.

NAND is less likely to suffer the same fate because demand conditions still remain strong. According to Gartner, smartphone shipments are expected to rise by 35% to 630 million units this year. And by 2015, this figure is set to more than double, to 1.1 billion units. JPMorgan Chase, too, forecasts an astounding 55.2% rise in tablet shipments to 99.3 million units for the year 2012.

NAND also stands to gain from the booming cloud computing industry. With more people and businesses set to rely on cloud computing and storage, the market for enterprise-class solid-state drives is also set to grow tremendously. IDC expects cloud computing to integrate into most connected devices by 2013, and spending on cloud computing services is expected to touch a whopping $72.9 billion by 2015. Now that would definitely require a lot of NAND!

Given the growth potential of the NAND flash industry, here are a few companies that you might want to keep an eye on:

SanDisk (Nasdaq: SNDK  ) not only makes memory for mobile devices, but also has exposure in the high-margin and high-growth market for enterprise SSDs through its recent acquisition of Pliant Technology. Thus, it stands to gain a lot from its flash memory business.

On the other hand, STEC (Nasdaq: STEC  ) , which specially caters to the enterprise space, has generated lower revenue in its fourth-quarter results mainly due to stiff competition from other players. However, as fellow Fool Anders Bylund explains, the downside to serving enterprise customers is that products need to go through stringent quality control measures before big orders are placed. That's another reason STEC's results have not kept pace with the market trend.

OCZ Technology Group (Nasdaq: OCZ  ) has had a dream run in terms of top-line growth as the company has witnessed growing demand for its SSDs from enterprise customers. This was apparent from its latest fiscal third-quarter revenue, which was up by an astounding 94% to $103.1 million. The company also expects better sales in 2012, though it needs to start making a profit (for a change).

Micron Technology has its hands in the DRAM as well as the NAND space. While NAND has been a growth point for the company, its profits are being weighed down by its DRAM business. For this reason, I would stay away from Micron until we see some signs of overall improvement in its business.

The Foolish takeaway
The NAND party isn't over yet. I expect to see demand for these memory chips grow as long as tablets and smartphones remain popular. You want a piece of the action, right? Don't forget to stay up to speed with the latest news on the NAND flash industry by adding the following tickers to your Watchlist. It's free and lets you stay on top of the latest news and analysis for your favorite companies.

Fool contributor Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of JPMorgan Chase and Intel. Motley Fool newsletter services have recommended buying shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (6)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 12, 2012, at 3:54 PM, winklerf wrote:

    Volatile memory (RAM) is not very profitable because it is trivial to design it. This has led to many entrants in the market, little differentiation in products and a race to the bottom on prices. The end result is very little profit for anyone.

    Non-volatile memory (flash) is showing signs of not being very profitable in the future because it is also becoming trivial to design, leading to more entrants to the market and downward pressure on prices. The difficulty with flash is mostly with the process of making the device itself, not with the design as it were. A flash cell can only be so complex, as it has a very small set of features to be managed. At the end of the day, it isn't complex enough to keep hordes of low cost producers out.

    What is complex with regard to flash is the controllers that manage SSDs. They are complex enough that not just anyone can come along and design their own that is competitive. As a result, the companies that produce decent controllers should be able to prosper when tablets/smartphones get meaningful quantities of flash and SSDs becomes standard in notebooks.

  • Report this Comment On March 12, 2012, at 6:32 PM, boisemr wrote:

    The author should read the 8-K filed 2/28/2012 to understand the transaction. Intel is still getting plenty of flash for SSDs.

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