Shares of Micron Technology (MU - Analyst Report) rallied 5.3% on Sep 4, after Hynix, the second largest dynamic random access memory (DRAM) chip maker, suspended its operations at the Wuxi plant in China due to a fire.
Hynix's share in the global DRAM market was 25.7% in the first quarter, according to iSuppli. Although the company is expected to resume operations in its plant shortly, no specific time has been given. These uncertainties worked in favor of other DRAM makers such as Micron and SanDisk (increased 3.3%), which expect to gain from the supply disruptions related to the fire.
Moreover, if Hynix is not able to resume operations shortly, it would result in a supply crunch, favorably impacting DRAM prices. As such, the DRAM market is already seeing supply constraints due to the rising demand for the memory chip by smartphone makers such as Samsung, Apple (AAPL - Analyst Report) , Nokia (NOK - Analyst Report) and HTC.
The other positive factor for Micron is the Elpida acquisition, which is expected to increase the wafer manufacturing capacity by approximately 50%, helping it to capitalize on any demand shortage. Micron is also optimistic about supply/demand balance for DRAM and NAND memory chips in 2013 and 2014.
Moreover, Micron had swung to profit in the last reported quarter (third quarter of 2013) after reporting losses for seven consecutive quarters. The company reported solid operating performance on the back of higher revenues and lower costs.
We believe tight expense control, manufacturing efficiency and the secular shift toward mobile DRAM will benefit Micron’s fundamentals in the coming quarters.
Though Micron’s prospects in the mobile DRAM market look promising, it will not be easy to outpace Samsung. Samsung has held the largest share of this market for years and there are indications that it will continue to do so in the next few years as well.
Currently, Micron has a Zacks Rank #1 (Strong Buy).