Semiconductor solution provider Micron Technology Inc. (MU) gained nearly 10% in yesterday’s trade following news that it revised the DRAM supplying agreement with Inotera. As per the new 2015 Supply Agreement, Micron will purchase Inotera’s DRAM output at a discount to the market price. The 2015 Supply Agreement is valid til Dec 31, 2015.
The last supply agreement was signed on Jan 17, 2013 under which Micron was to buy Inotera’s DRAM production at market price. Therefore, the amended agreement will have a positive impact on Micron’s margins for fiscal 2015.
Furthermore, a separate two-year supply agreement has been signed by the companies per which the “price for DRAM products sold to Micron is based on a formula that equally shares margin between Inotera and Micron”. This deal is scheduled to take effect in 2016.
Taiwan-based Inotera was formed in 2003 as a joint venture between Nanya Technology Corporation and Infineon. The company provides DRAM memory foundry services especially on 300-mm silicon wafers.
In 2009, Micron partnered with Nanya in Inotera and bought a significant portion of ownership interest in Inotera. As of Dec 4, 2014, Micron had a 33% ownership interest in Inotera.
In fiscal 2014, Micron purchased approximately $2.68 billion of DRAM products from Inotera which accounted for nearly 38% of its total DRAM gigabit production. With such a massive exposure to a single supplier, we believe that the recent deal will positively impact the memory chipmaker’s profit margins, going forward.
In first-quarter fiscal 2015, the company posted a 13.1% year-over-year increase in revenues. The substantial year-year-over increase was mostly driven by improving market conditions. Also, better-than-expected demand for both DRAM and NAND contributed to the overall revenue growth. Going forward, the company is also optimistic about supply/demand balance for DRAM and NAND memory chips in 2015, which should support prices.
Micron has been constantly innovating in memory technologies, spanning DRAM, NAND and NOR Flash memory solutions, which are being widely used in the latest mobile computing devices as well as in consumer, networking and embedded products. However, it may not be easy for Micron to capture share from SanDisk Corp (SNDK) – a key player in the NAND space.
Currently, Micron has a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the technology sector are Intel Corp. (INTC) and NVIDIA Corp. (NVDA), both carrying a Zacks Rank #2 (Buy).
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