The NAND landscape. Apple (AAPL) has constantly been suing Samsung (OTC:SSNLF), the largest producer of NAND memory in the world. And Apple also is a customer of Samsung for NAND. Apple has also been a customer of Toshiba (OTCPK:TOSBF), which can’t accomplish its spin off of its memory unit and is in full on litigation with its joint venture partner Western Digital (WDC). The future of Toshiba’s Fab 6 which would make the next generation of memory is entirely unclear. And then there is SKHynix (OTC:HXSCF) which is only now ramping to a 48 layer 3DNAND while its competitors are all in full production with 64 layer product.
And finally there is Micron Technology (MU) trading at a paltry 5x forward, and 12x trailing, PE. Micron has the most dense 3D memory chip available which gives it a cost advantage and should give customers concerned about critical real estate, like the inside of a smartphone, a space advantage.
So what is Apple to do? Right now things in the Micron part of the memory market should look invitingly calm if you are a massive consumer like Apple. They have no IP lawsuits with you. They aren’t in litigation with a JV partner. And they are a leader, at present, in terms of technology.
Apple should consider:
Tim and Donald discussing tax on repatriation of foreign cash?
Why should Apple bother? Many of us learned about Micron from articles here by the great Russ Fischer. Russ wrote in 2013 that Intel (NASDAQ:INTC) should acquire Micron. I wrote a rejoinder in November 2013 that perhaps Apple should acquire Micron. So far we are both wrong. (Be charitable. Call one of us early.) After making many millions of dollars for faithful Seeking Alpha readers, Russ suffered a major stroke. He is recovering and I hope I don’t set him back to say that I still think Apple is the more logical buyer. Who knows? Maybe one day one of us could be correct.
Russ was great at boiling complicated stuff down so us mere mortals could understand it. Let me try to channel my muse here.
First, pretend you are buying an iPhone. Go to the Apple store and see that an upgrade from 128GB of NAND on an iPhone 7 is priced at $100. Next, wander over to inSpectrum to see what Apple might be paying to fulfill your upgrade. Scroll on down to the 128Gb chips and multiply by 8 to get 128GB for your upgrade. On August 6 as I was writing this, the spot price for the 128Gb TLC chip was $4.70. And so 8 of these would cost $37.60. Of course Apple doesn’t pay spot and presumably they get a pretty sweet contract price. They also are presumably still buying whole wafers and are sawing them down, testing them, and packaging themselves achieving an even better cost. But let’s just call it a $62 margin on your $100 upgrade to keep the math simpler. This is way down from a 92% margin Apple was getting on a 16GB upgrade when I wrote my November 2013 article. Maybe IDTT (It’s Different This Time)?
Now humor Toni Sacconaghi of Bernstein who has just written that he thinks Apple will sell 251,069,000 iPhones in 2018. Gee, lets assume that there is a memory shortage and Apple is only able to get enough memory for a base model phone (128GB in the case of the iPhone 7 on the Apple store site linked above). OK maybe they scrounge up enough NAND for a few upgrades but 100 million upgrades are foregone since Apple’s Tim Cook (Apple CEO and supply chain czar) is margin sensitive. Hmmm, 100 million phones that don’t generate a $62 margin on this memory upgrade. Why that would be $6.2 billion in foregone gross profit! And if you rattle down through Toni’s model, this might mean a decrease in Apple’s earnings per share of around 50 cents. And then multiplying by a 17.79x PE according to Google finance, etc. etc.
Conclusions: There are lots of other reasons, besides the iPhone memory upgrade example, for Apple to cozy up to Micron. Toni Sacconaghi also thinks Apple will sell 39.6 million iPads, 19 million MACs, and 14.4 million watches in 2018. All of these consume NAND. They also consume Micron’s primary product line of DRAM.
Beyond NAND and DRAM Micron could help Apple’s ambitions with new memory types and artificial intelligence. The Micron/Intel jointly developed 3DXpoint memory comes to mind with regard to new memory. I would steer readers to Stephen Breezy’s wonderful first article on SA “The iPhone 5 Technology Rabbit Hole.” He was writing about phase change memory and the days of run time life it could give an iPhone. Of course it didn’t happen in the iPhone 5 and hasn’t appeared in subsequent models. But PCM is at the heart of 3DXpoint. A Micron controlled, or buddied up to, by Apple might yet see such an implementation.
On the AI side, one needs look no further than Micron’s supply of advanced DRAM to Nvidia (NVDA) for its GPU’s.
Naysayers will point out that Apple hasn’t bought anything larger than its Beats headphone company. They should. Naysayers will suggest that it wouldn’t work for Apple to sell memory that it doesn’t need to competitors. Nonsense! This is what Samsung does every day of the week, including to a competitor named Apple.
Russ Fischer is doing a little better. He isn’t hunched over a computer reading Seeking Alpha or comments to articles but we make sure he hears those of interest. When I last spoke with him, he was scheming about buying a Ford truck, racing watercraft with his son again, and journeying to Seattle. I can’t wait to see him turn his nurses into millionaires with some of his trading ideas. Nice to see that a fellow going through what he is, and what he has gone through, is still developing a bucket list.
Disclosure: I am/we are long MU, INTC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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