Top Three Risks For Micron Technology, Inc. (MU)
Micron Technology, Inc. (NASDAQ:MU) delivered better than expected earnings for the fourth quarter of its fiscal year 2015. This came after depressed third quarter financial numbers. Just when everyone was thinking that the company was returning to the path of delivering better than the estimated results, Greenlight Capital threw a bomb. David Einhorn of the investment firm appears to be not convinced with the results and believes that there are risks that govern the stock currently. He has slashed his fund’s position in the last quarter. Though the company might reward its shares in the long-term, there are also several risks that might have the potential to derail the long-term thesis. Let’s see the three risk factors.
China’s Move To Make DRAM
Einhorn believes that Micron Technology, Inc. (NASDAQ:MU) would have to face the catastrophic risk of China’s move to make DRAM. Currently, there are three big players in Micron, SAMSUNG ELECT LTD(F) (ADR) (OTCMKTS:SSNLF), and SK Hynix. Therefore, the oligopoly appears to be strong with Micron also possibly trying to acquire Nanya, Winbond or Inotera. China is lacking in the manufacturing of DRAM and it indicated investments of a maximum of $157 billion to create the semiconductor industry. As part of that, China-based Tsinghua Unigroup indicated its interest to buy the company for $23 billion.
It would not be an easy task for China to make DRAM without the help or support of Micron Technology, Inc. (NASDAQ:MU) or Samsung or Hynix. During a conference, it was disclosed that Chinese company need a minimum of $40 – $50 billion to establish a credible DRAM manufacturing facility in five to ten years time. That might be a big deterrent. However, Tsinghua is taking steps though there are doubts whether that would be sufficient to curb a new entry into the industry.
Risk Lies In NAND
According to Greenlight Capital’s Einhorn one of the risks to Micron Technology, Inc. (NASDAQ:MU) lies in NAND, i.e. whether its 3D NAND solution can be a cost-disruptive one. Both Intel Corporation (NASDAQ:INTC) and Micron think that it can. On paper, it might appear a good thing. However, there is no guarantee that the chip maker would be in a position to get the product out in large volume in 2016. The company sees 50% of its NAND bits coming from its 3D NAND by the next year end. However, the investment firm manager thinks that any unexpected technological issues could upset its plans. SAMSUNG ELECT LTD(F) (ADR) (OTCMKTS:SSNLF) has released its 3D NAND version nearly one and half years back. However, the Korean firm is still encountering issues like ‘leakiness’ of its product, as well as, low yields. Therefore, there remains a risk as to how Micron will manage any possible engineering challenges that might have the potential to lead to unavoidable delays.
Another risk cited by Einhorn in respect of Micron Technology, Inc. (NASDAQ:MU) is the option to use a floating gate 3D NAND design. The company has aligned with Intel Corporation (NASDAQ:INTC) to produce floating gate 3D NAND. The current leaders of NAND design were fully aware of the nuances of selecting 3D NAND architectures. The activist investor believes that it can have the potential to create a long-term risk, which cannot be ignored slightly.
Next Generation NVM
The third risk factor is that both Micron and Intel have jump started with a big lead in the next-generation NVM with the disclosure of 3D XPoint. Their initial presented appeared to have been rushed. That was because it did not make the general public to see it as an interesting chip. He compared it with the presentation of Steve Jobs of Apple Inc. (NASDAQ:AAPL)’s fanboys with iPads, as well as, iPhones. While there is no doubt about the performance characteristics, the cost of making, as well as, the capability to scale is conveniently not discussed by the management with the investment analysts. Intel disclosed that XPoint-powered SSDs would be available next year.
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