What happened
Shares of Micron Technology (MU +3.86%) were spiking in early trading on Thursday, up as much as 7.4% in early trading before settling into a 5% gain as of this writing. Keep in mind that this price spike came after a big gain yesterday as well as with the tech sector snapping back from its January swoon.
However, Thursday's rise was more sector-specific, having to do with production issues at a main competitor, as the broader tech index was down today. Given that there are only a handful of big memory-chip suppliers globally, any disruption at one site could lead to short supply and a rise in memory chip prices for everyone else.
A machine producing chips. Image source: Getty Images.
So what
Late on Wednesday, NAND flash suppliers Western Digital (WDC +0.97%) and Japan-based Kioxia, which have a joint venture to produce NAND flash chips, announced that contamination of some key materials at two of their Japanese production sites would hurt the companies' joint output of NAND.
NAND is a high-growth industry, especially today. This modern storage medium is rapidly displacing hard-disk drives in many tech applications, and is thus crucial to support the boom in semiconductors. However, it has been difficult for many NAND flash producers to make money in recent years, as flash modules are commodity-like chips whose price fluctuates with supply and demand. More often than not, supply has exceeded demand in recent years and NAND flash prices have generally been on a downward trend. But not today.
Western Digital released a statement saying about 6.5 exabytes would be affected, but when factoring in Kioxia's output, the total industry shortfall likely amounts to much more. Wells Fargo analyst Aaron Rakers estimates the problem could affect as much as 10% of the industry's quarterly output. The companies also did not specify when operations would return to normal.
That big of a reduction could cause material increases in NAND flash prices in the near term, and those heightened profits would go to competitors, with Micron being a main beneficiary.
Now what
A shortage in NAND flash would certainly help Micron's near-term profitability, even though NAND is a relatively small portion of its business today, at 24% of total revenue last quarter. NAND flash prices had actually been falling in recent quarters, as supply shortages of other types of chips have limited output at PC makers. Yet as is the case with the current semiconductor shortage, it seems that when one problem is solved, another pops up, as is now the case with NAND flash modules.
Of note, Western Digital and Kioxia said the production delays are occurring in their most advanced 3D NAND chips. That could open up an even bigger opportunity for Micron, whose management recently claimed it was "several quarters ahead" of competitors in producing the most advanced 176-layer 3D NAND modules.
With a shortfall of advanced NAND, Micron may be able to sell its leading-edge NAND chips even more profitably this quarter. The average analyst EPS estimate for Micron in 2022 is $8.97, but look for that profit expectation to rise amid this supply problem.
If inflationary pressures find their way into the memory industry to a greater extent, Micron could continue to do well this year, even after its strong run this week.
