Micron (NASDAQ:MU) and Samsung (NASDAQOTH:SSNLF) compete against each other in several flash memory markets. Both companies produce DRAM, NAND, and NOR flash memory, along with a wide range of SSD (solid state drives) for PCs and data centers.
But whereas Micron's business is entirely based on memory technologies, Samsung is a diversified conglomerate that produces a wide range of semiconductors, displays, consumer electronics, and mobile devices. Let's dive deeper into these two stocks to see which one has more upside potential.
Micron's strengths and weaknesses
Micron isn't a market leader in any of the key memory chip markets. At the end of 2015, it controlled 14.3% of the mobile DRAM market and 13.9% of the NAND market, according to DRAMeXchange. That makes it the third-largest mobile DRAM player after Samsung and SK Hynix, which respectively controlled 58.2% and 26.1% of the market. In NAND chips, Micron is the fourth-biggest player after Samsung, Toshiba, and Sandisk (NASDAQ:SNDK) -- which respectively controlled 33.6%, 18.6%, and 15.8% of the market.
Last November, research firm IHS reported that Micron controlled just 7% of the SSD market, trailing far behind Samsung's 41% share, Intel's (NASDAQ:INTC) 16% share, and Sandisk's 10% share. Those smaller market shares leave Micron vulnerable to bigger competitors which can lower production costs with economies of scale. To make matters worse, a global oversupply of DRAM chips -- which account for nearly 60% of Micron's sales -- will likely weigh down average selling prices this year.
Last quarter, Micron's revenue fell 27% annually to $3.35 billion and missed estimates by $110 million. Average selling prices for DRAM and non-volatile memory (mostly NAND) bits respectively fell 13% and 7% sequentially, while gross margin declined from 36% in the prior-year quarter to 25%. As a result, non-GAAP net income plunged 38% to $249 million, or $0.24 per share -- which still beat estimates by a penny. Looking ahead, things don't look great -- Micron expects its second-quarter revenue to fall 22% to 30%, missing the consensus estimate for a 17% decline. On the bottom line, Micron expects a net loss between $0.05 and $0.12, well below an expected profit of $0.22.
Samsung's strengths and weaknesses
In addition to being the market leader in memory chips, Samsung has a well-diversified portfolio of market-leading positions in several markets. Last quarter, 47% of its sales came from its IT and mobile (IM) business, 37% came from device solutions (DS) like semiconductors, and 26% came from consumer electronics (CE). Samsung's total sales rose just 1% during the quarter.
IM sales fell 5% annually, mainly due to a 4% decline in mobile device revenue. DS sales rose 11% -- with semiconductor sales rising 24%, memory sales (included in the semiconductor total) inching up 2%, and display panel sales falling 7%. Those numbers tell us three things -- the mobile market remains challenging, its recent investments in its chipmaking business are paying off, and its display panel business is being hurt by lower demand for tablets and PCs. CE sales fell 3% as strong holiday sales of TVs in North America were offset by weaker demand in other markets.
On the bottom line, things look much worse. Net profit plunged 40% annually during the quarter, mainly due to weakening profitability at its mobile and semiconductor businesses. Investor relations chief Robert Yi told analysts that "it will be a challenge to maintain last year's earnings levels" in the first half of the year, due to macroeconomic headwinds and sluggish demand for IT products. However, other Samsung execs emphasized that new mobile software and services could become fresh sources of revenue, while strong sales of low to mid-range smartphones in developing markets could offset slower demand for its premium devices.
The winner: Samsung
I believe that the choice between Micron and Samsung is an easy one. Micron has a top-heavy business which is dependent on a commoditized market and has less pricing power than its bigger rivals. Samsung is also under pressure, but it's a bigger and better diversified company that can still pivot its businesses toward higher growth markets. For example, it can use its supply chain operations and foundry to offset slower mobile device sales, or expand into the Internet of Things to increase sales of its smart appliances and TVs.
Therefore, Samsung is definitely a better long-term investment than Micron. However, many investors might not know how to invest in Samsung, since it isn't listed on major U.S. exchanges. The easiest way is to buy the OTC shares (SSNLF), but these unsponsored shares trade with very little volume. Instead, it's probably wiser to use a brokerage which can directly buy the official shares from the South Korean or European exchanges instead.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.