The very real prospect of self-driving automobiles may garner thoughts of a futuristic world where everything is different -- well, everything except for the need for massive computing power, and the memory necessary to power it.
In recent months, Alphabet's (GOOG +0.08%) (GOOGL +0.14%) Waymo unit has conducted trials with its leading self-driving technology in Phoenix. Tesla (TSLA +0.76%) has promised its 2016 cars have "full self-driving capabilities," (you know, once the software updates come), and Apple (AAPL +0.33%) engineers recently published a report on a self-driving breakthrough in a public journal. Many hoping to cash in on the self-driving future may be angling to see which of these tech giants cracks the code.
However, I think the companies that may benefit the most -- or at least as much -- are the old-fashioned memory-chip makers, specifically those that produce DRAM (Dynamic Random Access Memory).
Image source: Getty Images.
I've got the need, the need for speed
Whichever company or companies emerge as the leaders in the new age of self-driving vehicles, one thing is for sure: These cars will need a lot of computing power. Their sensors, whether lidar, cameras, ultrasonic, or sonar, will be relaying massive amounts of data to the car's central computer for instant processing and analysis. That means there will be a huge need for memory -- both DRAM and NAND.
NAND flash memory is nonvolatile, which means that it can store data even when power is turned off and can be written, erased, and rewritten over and over. DRAM is volatile memory, which powers applications and programs only while power is on, but it enables programs to run faster. Given the need for instant computing power in autonomous vehicles (so, you know, the vehicle doesn't miss something and crash), self-driving cars will need lots and lots of DRAM.
The DRAM players
Traditionally, the DRAM market has been violently cyclical, since DRAM has traditionally been a commodity product. However, bankruptcies and consolidation over the past decades have left just three players with roughly 95% of the DRAM market, up from about 60% in 2007. These three are Micron (MU 3.34%), SK Hynix (NASDAQOTH: HXSCL), and Samsung (NASDAQOTH: SSNLF). As has been the case in other industries such as airlines, a consolidated industry has brought increased profitability across the board, and cyclical peaks and valleys have become more muted in recent years.
MU EBIT Margin (TTM) data by YCharts
How much?
On the company's last conference call, Micron CEO Sanjay Mehrotra said of autonomous vehicles:
When you look at autonomous vehicles, they really are Level 5, autonomous vehicles in the future projected to have about 40 gigabyte of DRAM content in them. And when you think about it, that is very similar to the average capacity that is associated with servers in the server workstations. ... They will be generating... data to make millions of real-time split-second decisions to make sure that the passengers in the autonomous vehicles can be transported effortlessly and safely to their destination.
In 2016, there were about 11.1 million servers shipped worldwide; however, there were also 88.1 million cars sold -- eight times the amount of servers. Theoretically, DRAM makers could be faced with eight times the demand they have for their server segment.
In its most recent fiscal year, server markets made up about 15% of Micron sales, which was roughly the same for SK Hynix. Therefore, an eight times increase would result in a more than doubling of revenue. Of course, these companies already serve the auto industry for all of the computing power present in today's cars -- but with Level 5 autonomy on the horizon, this should only increase.
A growing memory market with more muted peaks and valleys. Image source: Micron 2017 Analyst Day Presentation.
A new age of DRAM?
The DRAM market has been a boom and bust cyclical industry for the last 30 years, but could this be changing? Its traditional mobile phone, computer, and server end markets are now being supplemented with cloud data centers, edge computing for the Internet of Things, and autonomous vehicles. The fact that the DRAM markets are now more diversified while the industry has consolidated means the very unsexy nuts-and-bolts memory producers could be the companies that benefit the most from the grand new age of autonomous vehicles and AI. Go figure.
