What does it mean for the skyrocketing memory sector? In a last minute plot twist, Bain capital appears to be the winner in the auction of the Toshiba memory unit. The Bain consortium includes a strange cast of characters including Apple, Dell, Seagate, Kingston Technology, Innovation Network Corp of Japan and Development Bank of Japan.
Toshiba has long been the number two NAND maker after Samsung and clearly has a very impactful position in the market. Given that NAND has been red hot, driving the fortunes of Samsung and the stock price of Micron what will the impact be of the strange bedfellows? In addition, the semiconductor capital equipment companies have also been on fire due to NAND as spending, led by Samsung, has been huuuge.
Given that Toshiba has been on the precipice of bankruptcy for quite a while and otherwise distracted, what will a deep-pocketed, focused, smart financial buyer mean to the operation of the company? How do end users such as Apple, Dell & Kingston fit in and what does it mean for their impactful NAND buying habits?
Samsung has doubled down while Toshiba fiddled around…
Samsung has not stood still while Toshiba has been distracted. While its unclear exactly how much damage was done to Toshiba, especially at the low level engineering levels where the technology rubber meets the road, we would imagine that Toshiba memory would be in better shape today had the parent company been in better shape. While nobody has an unlimited budget it sure feels like Samsung is investing in memory as if that is the case. Perhaps they sensed a potential opening and were trying to not only garner the increased demand but also take share from a competitor which may not have invested enough to keep up.
Once the deal closes we would expect that given the deep financial resources of the Bain consortium there will likely not be any financial limitations on capital spending or R&D spend.
Could Toshiba spending pick up as Samsung digests its purchases?
From a semiconductor capital equipment perspective a renewed Toshiba memory unit could be music to their ears . We would expect the deal to be closed and the group to have its act together by the beginning of next year, perhaps with enhanced spending plans. Even if Samsung slows from its crazy pace, Toshiba would likely take up the slack and if Samsung doesn’t back off the spending could go into ludicrous mode from the current insane mode.
Semicap equipment- Arms merchants to the NAND warriors…
While we could see some share shift in semicap equipment players depending upon which NAND maker is spending, the overall spend levels are likely to remain very strong over the next year at least.
Obviously those companies tied tightly to Samsung are doing great right now. Lam obviously does very well with Samsung. ASML does not get nearly as much benefit out of memory as compared to Samsung’s logic/foundry side or TSMC. A shift to Toshiba won’t change that. AMAT does a little bit better with Toshiba than Samsung.
But overall….its still good….as the NAND wars increase the semicap tool makers will sell more bullets.
Do Apple, Dell & Kingston bias their purchases?
Obviously Apple would rather give their NAND business to anyone but Samsung so tying up with Toshiba is right up their alley. Dell and Kingston less so, but still have reason to fear Samsung’s long reach. Having Apple, Dell , Seagate and Kingston as almost guaranteed customers means that Toshiba can invest more aggressively as they have fewer concerns about the bottom dropping out of demand as those three can suck up a huge percentage.
If Samsung sells more into the spot market, the pricing may be better but demand obviously more variable. In the near term obviously not a problem but less so in the longer term.
Does having these three as investors reduce margins at Toshiba as they likely get a deal? We doubt much impact as no one gets a better deal than Apple anyway as they are the biggest NAND user in the market.
Overall, this end user investment in the consortium adds a level of complexity thats hard to figure out and complicates the market for memory.
Deal details are still unknown- confusing crosscurrents…
The full deal details have not been released and we can only imagine that some terms are likely still in flux but Toshiba was under the gun to get a deal announced so they probably rushed things out before all the terms were fully nailed down and put to paper.
How much control Toshiba maintains could be critical. We doubt that a bunch of smart guys like Bain would give up critical decision making on their $18B investment.
Japan clearly wants to keep technology out of China or other geopolitical competitors so keeping a hand in management makes sense for them.
As the details come out it will be interesting to see who got what part of what they wanted. Our initial guess is that Bain probably got a pretty good deal as Toshiba was not in a great bargaining position.
The WD potential monkey wrench…
WD continues to assert that it has veto rights over any sale given their (Sandisk’s) long term buddy/buddy relationship with Toshiba. This is a complete wild card as they were obviously a bidder as well and are not likely happy losers.
Politics is involved as this is a cross border legal case that could drag out forever unless they cut some sort of deal with WD, maybe inviting them in to the deal in some way.
The opera may not be completely over
Even though it sounds as if the fat lady has sung it sounds from the press release that it may not be completely over and there could be last minute changes. Just a few short days ago it seemed that Bain was on the losing end so until the ink dries we could seem an encore from some other bidder before the curtain comes down. Toshiba, being desperate and in a tough position would likely still listen to offers if they could get a sweeter deal. In the near term they have satisfied the bankers and stock exchange with an announced deal and staved off an execution day.
Where does this leave Micron and Intel?
Given memory pricing, Micron remains in fantastic shape. We don’t know if they have been spending enough to take any Toshiba lost share so it may not matter much to Micron anyway.. Micron usually plays an opportunistic game and we are somewhat surprised they didn’t double down like Samsung did. But they are going to make a lot of money on the strong pricing anyway.
Intel still has XPoint, a technology we love and have high aspirations for. We are, however, very, very disappointed by Intel’s delays in getting it out the door but then again Intel also just delayed 10NM for the 3rd time deep into 2018. Its painfully obvious that semiconductors are not the priority at Intel anymore. We think Intel could have doubled down here but missed an opportunity to make more money in the memory business as management is more focused on anything but semi.
What about Samsung?
Of the industry, this is not great for Samsung as a weakened competitor in Toshiba left an open playing field for Samsung. More competition in NAND hurts them, but not that much given current strong demand.
The tie up of some potential Samsung customers in the consortium also makes life a bit more complicated for Samsung.
Given the issues of North Korea, the Chairman in jail and a potentially resurgent Toshiba, Soju sales are likely positively impacted.
The memory market and associated stocks…
The Toshiba sale is probably good for the market in the near to medium term as they will likely increase capex and help meet the huge demand for NAND which the overall tech market needs. Over the long term, over a year off, we could see the memory market softening sooner with more supply but right now that seems pretty far off as demand and pricing are very strong for the balance of the year and going into next year.
The semicap stocks have been on a tear since before and in anticipation of the Iphone release coupled with Korea news taking a sideline. This Toshiba NAND deal should be viewed as good news and will likely keep propelling the stocks higher from here
We still like Micron, KLAC, AMAT & LRCX (in that order) as all will see benefit which will support the increasing stock prices.
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