Micron Technology (MU 3.71%) and Western Digital (WDC +3.96%) are both major players in the memory and data storage market. Micron mainly sells DRAM and NAND (flash) memory chips, while WD produces NAND chips, flash-based SSDs (solid-state drives), and traditional platter-based HDDs (hard disk drives).
Both companies struggled with declining memory chip prices throughout 2019, as sluggish shipments to smartphone and PC makers caused a global glut of chips. DRAM and NAND prices gradually stabilized in 2020, but that recovery was throttled by pandemic-related disruptions in the first half of the year.
However, investors have been much more bullish on Micron than WD over the past 12 months. Micron's stock price rallied more than 50% as its memory chip sales improved, while WD's stock price remained nearly flat as its weak HDD business largely offset the growth of its NAND business. Will Micron remain a stronger investment than WD throughout the rest of the year?
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The key differences between Micron and WD
Micron generated 70% of its revenue from DRAM chips, another 27% from NAND chips, and the rest from other types of memory last quarter. That business model makes it the only "pure play" on memory chips in the U.S. market.
WD, which significantly expanded its NAND business by acquiring SanDisk in 2016, generated 52% of its revenue from flash products last quarter. The remaining 48% came from its legacy HDD business.
WD's HDD business has been shrinking as more PC makers have shifted to SSDs, which are pricier but also smaller, faster, more power-efficient, and less prone to damage than platter-based drives. It's trying to counter that secular shift by selling higher-capacity HDDs to enterprise and data center customers, but the segment's revenue and margin will likely continue to decline for the foreseeable future.
WD and Micron rank third and fifth, respectively, in the global NAND market, according to TrendForce's latest numbers. Samsung and Kioxia (formerly known as Toshiba Memory) rank first and second, respectively, and SK Hynix ranks fourth. However, SK Hynix will likely jump to third place after it closes its forthcoming takeover of Intel's (INTC +2.55%) NAND business.
In the HDD market, WD shares a near-duopoly with Seagate Technology (STX +0.00%), which hasn't aggressively followed its lead into the NAND market yet.
Which company is growing faster?
Micron's revenue declined 8% to $21.4 billion in fiscal 2020, which ended last September, as it grappled with low DRAM and NAND prices in the first half of the year. But its revenue rose in the second half of the year thanks to rising sales of PCs during the pandemic, the production of new 5G smartphones and gaming consoles, and robust orders from data center customers.
Those accelerating tailwinds boosted its revenue and adjusted earnings by 12% and 63%, respectively, in the first quarter of 2021. Its DRAM revenue jumped 17% year over year, and its NAND revenue grew 11%.
Micron expects DRAM and NAND prices to rise throughout 2021. Based on these catalysts, analysts expect its revenue and earnings to rise 17% and 47%, respectively, for the full year -- which are impressive growth rates for a stock that trades at just 11 times forward earnings.
Image source: Getty Images.
Western Digital's revenue rose 1% to $16.7 billion in fiscal 2020, which ended last July. However, its adjusted earnings plunged 37% as weak NAND prices crushed the flash unit's margins and its HDD margins continued to contract.
WD's fortunes didn't improve in the first half of fiscal 2021. Its revenue dipped 5% year over year to $7.9 billion during those six months, as its weak HDD business offset its rebounding flash revenue.
WD's HDD business struggled as weak demand from data center customers offset stronger demand from PC makers during the pandemic. The HDD segment's declining margins also partly offset its expanding flash margins.
However, WD's adjusted earnings still rose 40%, thanks to lower spending during the pandemic and an easy year-over-year comparison to the first half of 2020. Unfortunately, analysts expect its revenue and earnings to both decline about 4% for the full year before turning positive again in fiscal 2022.
WD's stock also trades at 11 times forward earnings, but it deserves that discount valuation a lot more than Micron. It also suspended its dividend last May, and probably won't reinstate those payments anytime soon. Micron hasn't paid a dividend since the 1990s.
The winner: Micron
I recently said Western Digital was a better investment than Intel since it has a clearer path to a turnaround than the struggling CPU maker.
But WD definitely isn't a better buy than Micron, which is recovering at a faster rate while trading at the same forward P/E ratio. Micron isn't as diversified as WD, but its streamlined exposure to the DRAM and NAND markets, along with its lack of a legacy HDD business, clearly make it a better overall investment.
