Computers and the semiconductors that drive them have been a driving force of the world economy now for decades. So it's no surprise that investors have long been interested in getting a piece of the billions in revenues that industry generates every year.
One stock that has pioneered the computer memory market and helped investors gain exposure to the profits it generates is Micron Technology (NASDAQ: MU). The company builds many different types of memory chips and semiconductors for a wide range of applications, including NAND flash for storage, DRAM for primary system memory, and 3D XPoint, a type of memory that's much faster than NAND (though slower than DRAM) but is non-volatile (meaning that it can store data even without being connected to power), unlike DRAM.
If you've considered making an investment in Micron -- which got its start more than 40 years ago in Boise, Idaho -- it's important to understand where the company makes its money and how each product type and end market drives the company's business.
Image source: Micron.
DRAM vs. NAND
Micron's two main revenue-generating products today are DRAM and NAND flash memory chips. Although the company has 3D XPoint manufacturing capabilities in place, that business doesn't yet generate enough revenue for the company to break out such sales in its financial reporting. So, the way to think about Micron today is as a company that sells DRAM and NAND flash.
During the first quarter of fiscal 2019, 68% of its Micron's revenue came from sales of DRAM while 28% came from NAND flash. It follows then that the company is far more sensitive to the ebbs and flows of the DRAM market.
Industrywide, DRAM sales were projected to crack $100 billion during 2018, while the NAND flash total addressable market (TAM) looks a lot smaller. Western Digital (NASDAQ: WDC), a competitor to Micron, pegged its NAND flash-related TAM at about $56.4 billion during its fiscal 2018.
While the DRAM market is much bigger, the NAND market has a lot more competition. During its analyst day, Micron made note of six significant NAND flash makers but only three key DRAM makers. With fewer competitors, profitability is generally better in DRAM, too.
Micron no longer discloses its gross margin by product type, but in its fiscal fourth-quarter 2018 earnings release, the company reported DRAM gross margin was 71% of revenue while trade NAND gross margin was 48%. So while both chip types are important to Micron, DRAM contributes meaningfully more to Micron's top and bottom lines.
It's also important to understand that DRAM and NAND have different end markets (and differing product requirements) and to have a good grasp of how important each of those market segments is to Micron's business.
Micron has four major business units: Compute and networking business unit (CNBU), mobile business unit (MBU), storage business unit (SBU), and its embedded business unit (EBU). The table below offers a brief description of each unit from the company's most recent annual filing, recent revenue figures, and the percentage share of revenue each unit contributed. By far, Micron's CNBU is its most important, with MBU in distant second.
|Business Unit||Description||FY 2018 Revenue (in Millions)||% of Total|
|Compute and networking||"...includes memory products and solutions sold into cloud server, enterprise, client, graphics, and networking markets."||$15,252||50%|
|Mobile||"...includes memory products sold into smartphone and other mobile-devices markets."||$6,579||22%|
|Storage||"...includes SSDs and component-level solutions sold into enterprise and cloud, client, and consumer storage markets as well as other discrete storage products sold in component and wafer forms to the removable storage market."||$5,022||17%|
|Embedded||"...includes memory and storage products sold into automotive, industrial, and consumer markets."||$3,479||11%|
Data source: Micron 2018 10-K filing.
Micron is a pure-play memory company that primarily sells DRAM and NAND flash, with DRAM being the company's key revenue and profit driver. Over time, the company could also see material revenue growth from sales of 3D XPoint-based products, although it's still unclear just how much of its overall business could come from that technology.
Micron has made sales inroads into a wide range of markets, spanning PCs, data center servers, and mobile devices -- all of the areas where you'd expect DRAM and NAND flash would be important. The company is also positioning itself in the automotive market. As cars and trucks become increasingly reliant on computing smarts to operate, there should be plenty of need for DRAM and NAND to supply that computing power. This could be a significant long-term growth opportunity for both Micron and the semiconductor industry in general.
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