State of Flux for Solid-State Drives

THURSDAY, OCTOBER 3, 2013

State of Flux for Solid-State Drives

MKM says smartphone and tablet sales are shifting from high-end to low-end.

MKM Partners

Following significant price increases in memory in late 2012 and the first half of 2013, DRAM appeared to be set for a return to a more normalized downward trajectory in the third quarter before a fire at Hynix’s Wuxi, China semiconductor fabrication plant (responsible for 12% of global DRAM output) in early September sent spot pricing dramatically higher. NAND prices, which had appeared to have stabilized, moved slightly higher in sympathy with DRAM on the possibility that some manufacturers, such as Samsung [of South Korea] and Micron Technology (ticker: MU) (rated at Neutral, $16 fair value) could switch capacity from NAND to DRAM to make up for the Hynix shortfall.Although some short-term actions are possible, our sense is that any capacity transitions will be kept to a minimum until the industry gains additional clarity on the situation. Longer term, significant capacity additions are unlikely as industry players have become more rational and less willing to expose themselves to oversupplied market conditions — our NAND and DRAM models suggest that even moderate supply increases based on shrinking geometries (rather than new production lines) will be sufficient to meet slowing demand growth in both DRAM and NAND. Near term, market conditions will likely benefit Micron, although we note that it has limited exposure to the spot DRAM market, and potentially SanDisk (SNDK) (rated at Neutral, $53 fair value) — although SanDisk has no exposure to DRAM, the stock may continue to trade above our fair value estimate on the possibility of a tightening NAND supply should other players shift capacity to DRAM.

Hynix has not disclosed the full impact of the fire, and uncertainty around its supply appears to be driving DRAM prices and the stocks of DRAM-exposed names such as Micron higher; the company has stated its intention to resume production in October, but recent media reports suggest that it may not be able to deliver to its customers products scheduled for October. This implies that the damage to the facility is extensive, and the industry may well be undersupplied through the rest of the year as tools are repaired or replaced and yields return to normal. Prices could thus remain high until customers have more clarity on global supply. Our sense is that the companies most impacted by this are lower-tier producers that rely heavily on the spot market, but a long-term outage could affect higher-end manufacturers as well. Our model suggests that if Hynix comes back online during the fourth quarter, the industry will remain undersupplied through first-quarter 2014, and won’t return to oversupply until second-half 2014.

Our model suggests that solid-state drives (SSDs) will be the fastest-growing application as overall bit demand slows to 35% in 2013 and 34% in 2014 (from 60% in 2012, and 80% in 2011) on lower growth rates from mobile devices and flattening card sales. In recent years, Apple (AAPL) has consumed approximately 20% of global NAND supply, due largely to its MacBook, iPhone and iPad product lines. However, our work implies that the average density of Apple’s devices is not growing; rather, average-sale-price trends for the iPad and iPhone imply that the highest-density 64 gigabyte and 128 gigabyte models make up a very small (below 5%, according to our calculations) share of devices sold — growth is thus limited to that driven by unit sales.

Our due diligence suggests that this trend is not limited to Apple, as consumer devices have hit a density plateau — smartphone and tablet sales are shifting from high-end to low-end, where manufacturers can save on build of materials (BOM) by reducing NAND content. The proliferation of SSDs across Apple’s laptop lineup should support Apple’s bit growth rate, but it will likely remain in line with the industry at 35%, and dip below the industry in 2014 as Apple’s share of smartphones and tablets shrinks, and SSDs proliferate in notebooks from other manufacturers. Industry bits into SSDs overall will likely be close to double in both 2013 and 2014 as more manufacturers use SSDs and hybrid devices in their laptops and SSDs make further inroads into the enterprise and data-center space, but slowing demand from other applications means reduced growth rates and declining prices for the industry nonetheless.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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