New Micron CEO Should Mull Pure Storage Buy
#Micron Technology (MU: Nasdaq) By Susquehanna Group ($29.03, May 12, 2017) Micron Technology’s hiring of Sanjay Mehrotra [as president and chief executive] (former CEO of #SanDisk) makes sense to us, given his rich background in the NAND industry.
While DRAM accounts for about 60%-65% of Micron’s (ticker: MU) revenue (and over 65% of total operating profit), it is Mehrotra’s NAND background and experience that could position Micron for long-term secular growth — which is all on the NAND side. However, we believe Mehrotra’s efforts to cultivate a higher-value solutions offering at SanDisk prior to its acquisition by Western Digital (WDC) should not be overlooked.
We contend that an aggressive move up the stack by Micron may be what it needs to alter the narrative from being a cyclical component vendor heavily exposed to DRAM to a vertically integrated storage solutions provider, much the way our top pick Western Digital (rated at Positive, $140 price target) is positioning itself in the nascent and fast-growing Data Center Solutions market ($23 billion total available market (TAM) by 2020). As such, we view the strategic rationale of a vertically integrated play as a compelling argument as Micron positions itself for the next generation of cloud infrastructure while (reinvented) incumbents like NetApp (NTAP) pursue the consolidation strategy. Moreover, as we noted in our storage system initiation report, proprietary hardware margins are under pressure, as hyperscale cloud customers push for a stoppage of margin stacking.
In this light, we argue that Positive-rated #Pure Storage (PSTG) would be an attractive target for #Micron, given: 1) Pure is a first-mover in the growing All Flash Array (AFA) space with a market-leading cost structure (about 65% product margins) that can be vertically integrated to extend cost leadership; 2) Pure’s expertise in firmware and system software can be leveraged to help Micron strengthen its solid-state drive (SSD) product portfolio to better compete with #WesternDigital, Intel (INTC) and #Samsung; and 3) we contend such a deal can be accretive by about 25 cents in calendar 2019, depending on various scenarios around mix of equity/cash. All in all, the addition of Pure would be a good first step in changing the narrative on Micron, and consequently its valuation multiple — which we believe is plagued by a broader underappreciation of Memory industry multiples.