Shares of Micron Technology (NASDAQ:MU) rose in early trading on Thursday, rising as high as 7.4% in early trading before settling into a 5% gain at the time of this writing. Keep in mind that this price surge came after yesterday’s big gain, as well as the tech sector’s comeback from its January slump.
However, Thursday’s rise was more sector-specific, tied to production issues at a key competitor, as the broader tech index was down today. Since there are only a handful of major memory chip vendors in the world, any disruption at one site could lead to memory chip shortages and price increases for everyone else.
Late Wednesday, NAND flash vendors western digital (NASDAQ: WDC) and Japanese company Kioxia, which have a joint venture to produce NAND flash chips, announced that contamination of certain key materials at two of their Japanese production sites would harm the companies’ joint NAND production.
NAND is a high growth industry, especially today. This modern storage medium is rapidly replacing hard drives in many technological applications and is therefore crucial in supporting the rise of semiconductors. However, it has been difficult for many NAND flash producers to make money in recent years, as flash modules are commodity-like chips whose price fluctuates based on supply and demand. . More often than not, supply has exceeded demand in recent years, and NAND flash prices have generally followed a downward trend. But not today.
Western Digital released a statement indicating that approximately 6.5 exabytes would be affected, but if Kioxia’s production is taken into account, the total industry shortfall likely amounts to much more. Wells Fargo analyst Aaron Rakers estimates the issue could affect up to 10% of the industry’s quarterly output. The companies also did not say when operations would return to normal.
Such a reduction could lead to significant increases in NAND flash prices in the near term, and these increased profits would flow to competitors, with Micron being the primary beneficiary.
A shortage of NAND flash would certainly help Micron’s near-term profitability, even though NAND is a relatively small part of its business today, at 24% of total revenue last quarter. NAND flash prices had actually fallen in recent quarters as supply shortages of other types of chips limited output from PC makers. Yet, as is the case with today’s semiconductor shortage, it seems that when one problem is solved, another arises, as is currently the case with NAND flash modules.
It should be noted that Western Digital and Kioxia said the production delays occur in their most advanced 3D NAND chips. This could open up an even bigger opportunity for Micron, whose management recently claimed to be “several quarters ahead” of competitors in producing the most advanced 176-layer 3D NAND modules.
With a lack of advanced NAND, Micron may be able to sell its edge NAND chips even more profitably this quarter. Analysts’ average EPS estimate for Micron in 2022 is $8.97, but expect that profit expectation to rise amid this supply issue.
If inflationary pressures penetrate further into the memory industry, Micron could continue to do well this year, even after its strong run this week.
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