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SanDisk And Micron: Relative Value


Micron will have cheaper 3D NAND than SanDisk within a year. Micron will jump from NAND laggard to NAND leader.

Micron's engineering advantage in NAND along with its ability to produce DRAM, NOR and XPoint will give Micron a huge edge in MCPs (multichip packages).

There is a paired trade opportunity: Buy MU and short SNDK as MU will outperform SNDK. I currently slightly prefer going long MU and having no position in SNDK.

Micron (NASDAQ: MU) and SanDisk (NASDAQ: SNDK) are the last two major memory manufacturers in the United States. SanDisk currently has a market cap of about $10 billion and Micron has a market cap of about $15.1 billion. SanDisk makes NAND flash chips. Micron manufactures NAND, NOR and DRAM. In the not too distant future, Micron will also be manufacturing 3D XPoint, a potentially revolutionary non-volatile memory. I want to compare the two companies and give a relative value assessment of Micron and SanDisk.

Over the last few years, SanDisk has been the cost leader in producing planar NAND. Micron has been trailing SanDisk by a wide margin as it has been unable to create a cost competitive NAND for many years now, and the relative value of the two firms has reflected Micron's inferiority in NAND compared to SanDisk. While I arrived at slightly different numbers, this article by Seeking Alpha contributor William Tidwell gives a good overview explaining how inferior Micron's NAND technology has been relative to SanDisk and the rest of the market (Samsung (OTC:SSNLF) and SK Hynix (OTC:HXSCF)).

SanDisk may also have an advantage over Micron in executive leadership. SanDisk is led by Sanjay Mehrotra, President, CEO and co-founder of the firm. He has been with SanDisk since 1988, and he is a highly respected engineer and executive in the semiconductor industry. He is listed as the inventor on more than 70 patents mostly focused on non-volatile memory and flash memory systems. To those who have listened to him on SanDisk's conference calls, he sounds confident and really gives the impression that he is clearly the smartest man in the room (because he usually is).

Micron is led by its CEO Mark Durcan. Durcan has been a 3-decade veteran of Micron. It certainly was not in the plans of the company to ever promote him to CEO. On February 2, 2012, the then 50-year-old Durcan announced his decision to retire from Micron. The following day, Steve Appleton, who was the CEO of Micron at the time, unexpectedly died in a plane accident. A few days later, Durcan was named the new CEO of Micron.

Durcan is known for his poor presentations skills and his inability to inspire shareholders. Around the 20:37 mark of this video, where Micron and Intel (NASDAQ:INTC) jointly announce 3D XPoint to the world, Durcan and Intel's Rob Crooke open up a cabinet to reveal the first wafer of 3D XPoint. It seems that Durcan is expecting a huge applause to this exciting round disk that looks pretty much like any other 300 mm wafer to the naked eye.

It is fortunate that Micron doesn't heavily depend on Durcan to sell products directly to consumers. While Durcan is certainly far from incompetent, I believe few Micron shareholders...