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At first blush, the news from IHS iSuppli that personal computers accounted for less than half of DRAM memory shipments for the first time since the 1980s might alarm you. Chip makers from Micron Technology (NYSE: MU ) to Samsung are in for a world of hurt if their bread-and-butter market can't sustain them.
Yet, in fact, the exact opposite is true. Although PCs don't account for a majority of sales anymore, they still account for a significant plurality but, more important, the market itself is still growing because there are more options for DRAM sales. It might be a cause for concern for PC makers Dell and Hewlett-Packard, but the proliferation of smartphones and tablets is a reason to be excited about what the future holds for DRAM producers -- specifically Micron, the last U.S. DRAM chip maker still standing.
Micron Technology snapshot
|Market Cap||$6.6 billion|
|Revenue (TTM)||$8.4 billion|
|1-Yr. Stock Return||(2.4%)|
|Return on Investment||(5.7%)|
|Est. 5-Yr. EPS Growth||12.9%|
|Dividend and Yield||N/A|
Source: FinViz.com N/A = not applicable; Micron doesn't pay a dividend.
Setting the table
Analysts say not to count the PC out just yet. Tablets have gained just 2.7% of the market in terms of DRAM consumption, or 264 million DRAM units, while cell phones have 13.2% of the space (though they anticipate it hitting 20% by the end of next year). So the 3.4 billion DRAM units for PCs shipped last quarter still represent a fairly huge market opportunity for chip makers, even if they're going to be competing with other forms of computing.
Yet, let's not forget that with Microsoft's Windows 8 operating system shipping soon, a new round of hardware upgrades could be mobilized. The enterprise market, in particular, will likely see greater sales of PCs, though manufacturers right now are experiencing a slowdown, as distributors await W8's late-October release. Dell is counting on W8 to salvage its sales as it transitions away from the weak consumer market; but, with HP dominating the space, that could become a difficult chore.
All together now
The chip industry is in the midst of a consolidation wave, with Micron's acquisition of Japan's bankrupt Elpida speeding it along. There are just nine chip suppliers these days, compared to 41 in 2007, but the number of customers for the industry's output has contracted, as well, dropping from 32 to just 11. Taiwan's Nanya became the last manufacturer in the country to exit the DRAM market, but Micron feels the consolidation will lead to industry stability, and lessen the volatility in pricing. Earlier this month, solid-state drive maker OCZ Technology (NYSE: OCZ ) warned that revenues would fall below expectations because of a shortage of NAND chips, with analysts suggesting supply and demand is coming back into balance.
Much hope may still ride on PCs but, for Micron, the overall growth of the chip market is what's key, and it anticipates the rise of tablets will spur the greatest demand. Solid-state drives will be key to future growth, and rumors are rampant that Micron is a contender with Western Digital (NYSE: WDC ) and Seagate Technology (NYSE: STX ) to buy OCZ. Analysts expect growth at the drive maker to outstrip rivals like Fusion-io (NYSE: FIO ) and STEC, despite the more immediate revenue concerns. Yet, there are some that say Micron's money-losing ways make it an acquisition target itself.
With DRAM prices stabilizing (and possibly rising in the future), along with fewer rivals and the chance to enter new markets, Micron's current price of $6.45 a share seems to offer an interesting valuation. I'd say without the purchase of OCZ it was fairly valued, but entry into the SSD market, where there's the greatest growth potential, would put it at a discount.
Already trading at a discount to its sales and book value, Micron has upward mobility, regardless of whether Wall Street analysts are unconvinced. I'm rating it to outperform the broad market indexes on Motley Fool CAPS, but tell me in the comments section below if you agree that Micron Technology is best able to capitalize on an expanding flash memory market.
A sky-high opportunity
PC makers aren't the only ones counting on Windows 8's success to drive hardware sales higher. The new platform is also one of the biggest risks Microsoft has taken in as many years. Read up on Microsoft in this new premium report. Sign up today and get additional updates included at no additional cost.