What happened
Shares of Micron Technology (MU 6.93%) were rallying today, up 5.2% as of 1:11 p.m. ET on Monday. The beaten-down maker of memory and storage chips didn't report any news of its own, but several positive industry developments today conspired to ignite a big move in the stock.
These included news of two competitors potentially merging, lowering competition in the oversupplied NAND flash sector. Also, positive analyst commentary on the semiconductor sector and Microsoft's (MSFT 1.40%) announcement of a big investment in OpenAI sparked optimism for chip stocks more broadly.
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Key Data Points
So what
On Monday, Bloomberg reported that Western Digital (WDC 7.70%) and Japanese flash producer Kioxia were in talks to potentially merge, and that talks had progressed, with an outline for the merged company's structure. Should the merger happen, it would likely entail a dual listing of the merged companies in the U.S. and Japan, with Western Digital's management likely to run the combined entity.
Unlike the more-consolidated and profitable DRAM sector, the NAND flash sector has never really seen good profitability, with the more-competitive forces often oversupplying the market. In late 2021, Intel sold its NAND flash unit and facilities to South Korea's SK Hynix, bringing the major NAND players from six to five.
With the very severe 2022 downturn in NAND flash prices, Western Digital attracted activist investor Elliott Management to buy a stake and advocate for changes in May 2022. That included separating the NAND flash business from the more profitable hard-disk drive (HDD) business, and perhaps selling the NAND unit to a competitor.
From the Bloomberg article, that looks to be on track. Should Western Digital and Kioxia merge, their combined market share would rival Samsung's leading position in the low 30% of the industry.
Why would that benefit Micron? Because NAND flash prices fluctuate based on industry supply and demand. The thinking is that four competitors would be able to control supply better than six. Technology transitions increase bits, so if a company wants to invest in leading-edge technology to stay competitive, it has to spend money and increase output. However, that perpetual spending and supply increases have led to too much supply and not many profits to go around.
Should the industry move from six competitors to four, the thinking is that the remaining players would be able to control supply and boost industry profitability. That would benefit Micron as well.
In addition to that news, the semiconductor sector was broadly rallying today, thanks to two positive analyst notes on the sector, in part due to China's rapid reopening. And with Microsoft's announcement that it would invest billions into ChatGPT parent OpenAI this morning, that likely also boosted Micron's stock, as AI applications require massive amounts of memory and storage.
Now what
Micron sold off hard in 2022, declining about 46%. Yet with the stock trading at the cheaper end of its historical range -- just above its book value -- and with the economic indicators improving, it's perhaps no surprise Micron and the rest of the sector is moving today. With the potential for more industry consolidation on the horizon, that's another cherry on top.
