WDC, STX, MU: Storage, Memory a Haven as Everything Else Under Scrutiny
According to Citigroup’s Glen Yeung, demand from mobile phones and forthcoming game consoles will help Micron, even as it continues to benefit from consolidation within the industry.
Now holding ~45% market share in DRAM (likely the limit in DRAM share), and operating in an industry that has consolidated down to 3 players, we see no incentive for the market leader to be price aggressive in DRAM. Under these conditions, Citi continues to model wafers allocated to the DRAM industry to be flat in 2013/2104 (0%/1% respectively) keeping bit growth in check (27%/29% bit growth respectively). We are incrementally encouraged that Micron will spend below the low- end of its guided FY13 cap-ex, deferring expenditures pending the Elpida acquisition. From a demand perspective, Citi’s Henry Kim expects Samsung’s upcoming Galaxy Note III to contain 3GB of mobile DRAM, nearing the system average for PC’s (~4GB). With smartphone penetration only 30% of the global population, we view demand pull from handsets as secularly growing. Recent configurations from game console makers add incremental confidence in DRAM demand—average DRAM per system has increased from 512MB to 8GB in one generation. Assuming 25M consoles of PS4/Xbox One are sold in 2014, this represents 3.8% of total DRAM supply, versus only 0.2% in the prior generation. Said differently, we expect game consoles to account for 13.5% of the total DRAM supply increase in 2014 alone. Indeed PC related DRAM demand is poor, but Citi stands by its estimate that non-PC applications will account for ~70% of DRAM consumption by 2014. Finally, with the Elpida deal nearing closure (bearing enhanced financial benefits due to yen devaluation) and memory prices likely to continue to rise, we remain positively biased to Micron shares, despite their 100% increase YTD. We estimate that Elpida will add $0.88 in incremental earnings to Micron EPS