The release of each new iPhone model sends shock waves across the technology sector. Unsubstantiated rumors identifying particular companies as iPhone component suppliers can send these companies' stock prices soaring skyward. Although many investors have considered Apple (NASDAQ: AAPL) the smartphone market leader since its launch of the revolutionary iPhone in 2007, market research from International Data Corporation (IDC) shows Samsung as having the greatest market share at 21.4% during the second quarter of 2015. IDC has Apple in second place with a 13.9% market share during Q2 2015. However, Apple’s status as the leading domestic manufacturer of smartphones attracts significant attention to the company’s decisions on component selection.
Micron’s iPhone Components
Micron Technology, Inc. (NASDAQ: MU) produces DRAM (dynamic random access memory) for Apple’s iPhone 6s. DRAM serves a function that is distinct from NAND flash memory. NAND flash memory is the storage memory, described as a “solid state drive” because it replaces the mechanical hard disk drive. Consumers can purchase iPhones with varying amounts of NAND flash memory, running from 16 to 128 gigabytes (GB). DRAM is the “volatile” or temporary memory, erased when the user cuts power to the device. Increasing DRAM capacity allows the user to run more sophisticated programs or applications. Increasing NAND flash memory allows the user to store more data, music and videos on the device.
Since introducing the iPhone 6 in September 2014, Apple has relied on SanDisk, Toshiba and SK hynix for its NAND chips, with Micron and Samsung phased out from supplying these components.
Tough Times for DRAM Chip Producers
Micron’s Jan. 8, 2016, SEC Form 10-Q report explains how declining sales prices for DRAM chips continue to suppress the company’s gross margin percentage, despite reductions in manufacturing costs. The report indicates a margin decline to 25 from 36% on a year-over-year basis, with net sales declining by 37%.
Micron’s stock price performance chart illustrates a gradual decline from a closing price of $36.49 on Dec. 5, 2014, through a bearish death cross on Feb. 25, 3015, to a Jan. 28, 2016, closing price in the single digits for the first time since May 8, 2013.
Sluggishness in the personal computer (PC) industry continues to impact Micron’s sales while demand for smartphones also remains slack. IDC estimates there was a 10.3% decline in global PC shipments during 2015.
Micron’s acquisition of Taiwan-based chip manufacturer Inotera reduces its DRAM production costs, although these reductions are offset by the low prices for DRAM chips due to market oversupply. The computer and smartphone industries consider DRAM a commodity with a spot price published at DRAMeXchange.com.
iPhone 6s to the Rescue
Apple’s February 2015 introduction of the iPhone 6s with increased DRAM capacity from 1GB to 2GB provides a sorely needed income boost for Micron. However, Apple’s decision to purchase approximately 50% of the iPhone 6s DRAM chips from Samsung is restraining Micron’s gains from the design change. As a result, TrendForce reports Micron’s mobile DRAM revenue at $695 million for the third quarter of 2015, leaving the company in third place behind Samsung's $2.58 billion in mobile DRAM revenue and SK hynix's $1.2 billion.
Micron’s successful collaboration with Intel in the development of 3D XPoint (pronounced 3D crosspoint) memory is helping Micron shareholders breathe a sigh of relief. Micron promotes 3D XPoint as a faster alternative to NAND memory with greater endurance. Semiconductor market researcher Jim Handy of Objective Analysis foresees utilization of XPoint as a persistent, fast memory storage rather than a replacement for NAND, taking sales away from DRAM. This approach demands a new hierarchy in memory architecture, with 3D XPoint between DRAM and NAND. Recent industry commentary suggests Apple’s possible incorporation of 3D XPoint into the iPhone, while providing tremendous performance advantages, appears unlikely in the near future.
Analysts are generally bullish on Micron, as the company has a forward price-to-earnings (P/E) ratio of 7.64. NASDAQ reports 11 strong buy recommendations, four buy recommendations, eight hold recommendations and an Oct. 21, 2015, underperform rating from Bank of America Merrill Lynch.