PonyWang
Micron Technology, Inc. (NASDAQ:MU) is a leading memory and storage chip manufacturer based in the U.S. After going through multiple decades of competition and economical cycles, MU becomes a national name that represents the U.S. semiconductor industry to testify to Congress on Chipmaking along with Intel. This stock is also heavily invested by intelligent investors such as Li Lu and Mohnish Pabrai. However, the stock prices are very volatile historically and subject to lots of external disruptions. I think MU is a great long-term investment opportunity given its quality and the inevitable digitalization of society. Here I would like to share some of my thoughts (especially NAND manufacturing).
An industry requiring large scales and investments
The memory industry has gone through a consolidation. All capacity kind of got down to five big players: Toshiba (OTCPK:TOSBF, OTCPK:TOSYY), Western Digital (WDC), Micron, Samsung (OTCPK:SSNLF, OTCPK:SSNNF), and Hynix. The economies of scale of these five are so good that smaller players have no ways to compete with them. You have to make 100K wafers per month in your fab (cost billions), or you keep losing money. The market is also able to consume new technology much faster. In NAND releases, you have 64 to 96 to 128 and then the current 176 layers. New products are constantly changing the dynamics of the industry. It is extremely difficult for an entrant to disrupt the dominance of current players.
The exciting prospects for NAND
MU is one of the leader in NAND technology. It has seriously challenged Samsung and SK Hynix during the last high-density 176-layer NAND competition. Although its market shares are still smaller than the two Asian competitors, it already leads in the technology development aspect as the CEO in recent earnings call stated:
Our 1-alpha DRAM and 176-layer NAND ramps are several quarters ahead of the industry and progressing well as we continue to qualify new products that use these nodes.
NAND memory (3D chip) is in high demand, with a long-term CAGR in high-20s. Since NAND doesn’t need power, is cost-effective per byte with high storage capacity, and is easily replaceable, it is the ideal option for mobile devices, data centers, automobiles, and Internet of Things (“IOTs”). It is absolutely one of the essential components for AI adoption.
CAPEX on chip manufacturing may not turn into profits
The transition from 2D to 3D (NAND) will lead to more bit growth (2x for 32 layers). But it is not free. You have intense capital requirements because of added etch deposition and lithography processes. If a 2D 28-nanometer chip needs 50 masking layers, transitioning to 3D definitely takes more masking layers, and every layer needs more cycle time and more lab built up. If the average processing time of each layer increases, then the full production cycle requires more days. Therefore, CAPEX can add capacity and complexity but may also increase production days. Not to mention other issues such as wear-out reliability curves where tools will drift and degrade. The cost of inspection and metrology (provided by KLA Corporation) will also increase proportionally. So the risk here is how MU makes sure its technology is good enough to ensure that the CAPEX yields are net-net profitable after adding manufacturing capacity. In other words, CAPEX is not wasted.
Regarding the capabilities of stacking layers and controlling manufacturing efficiency, MU seems to lead the competition so far. Here is what an engineering professor at Seoul National University said:
When you talk about the chip technology, higher yields are a key criterion. But when it comes to the stacking ability, you can say Micron is leading Samsung and other bigger rivals.
Semiconductor suppliers are very specialized
Because of the complexity and specialization of chip manufacturing, the supply chain is very thin and long. You may have 700-1000 steps in your processes and each step may only have 1 to 3 suppliers that qualify your requirements. For example, the 3-4 companies in Japan produce 90% of photoresists, 90% of fluorinated polyimide, and 70% of etching gas worldwide. These are essential materials with almost no alternatives. As the semiconductor industry demand continues to grow, a few production disruptions will lead to global shortages. More and more earthquakes, fires, and storms were seen on the news and become black swan events for the semiconductor makers like MU.
The competitive landscapes are much cleaner
Memory manufacturing is known to be a commodity-like business and very cyclical. Analyzing the timing of different stages in the industry cycle is often the key for investors. The dominating player here is definitely Samsung, with the backing of the whole country of Korea. But companies will purposefully multisource from two or more suppliers to keep Samsung’s price honest. For most memory products, price is the key as people buy when a minimum set of requirements were met. This leads to huge swings in unit prices.
However, the big five companies will likely sustain their market position in the long term. Demand becomes more stable as DRAM spending will eventually correlate with the number of servers and NAND will correlate with the number of mobile devices and AI deployment.
There are concerns about huge Chinese Semiconductor investment and partnerships with US companies. With the development of U.S.-China conflicts in recent years, China is likely out of the global competition. I think the industry has been consolidated enough that cyclical volatility is not as important as before. This looks more like an oligopoly market where companies focus on profit stabilization, not cost-cutting and margin compression. This should be true for other specialized suppliers such as Lam Research, ASML, and Tokyo Electron.
Bottom line
At a $67B market cap, MU has repurchased $4.3B of stocks and invested 41.6B into CAPEX in the last five years. It also has a five-year average of 7.6B operating income and 10B cash/22B current assets on its balance sheet. As a stock working in a growth industry (10%+ CAGR), there is no reason to believe it is an expensive stock. The recent plan of slower Capex investment shed light on the flexibility MU has to stay ahead of the competition. MU already has a big enough moat to defend its position. Although there will always be short-term uncertainties, the potential for long-term returns is very obvious to me.
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