Life is very good for NAND flash memory makers right now. That's ultimately a positive for the DRAM industry as well. The hard drive industry, on the other hand, might have mixed feelings.
Toshiba, the world's second-biggest NAND supplier after Samsung and a long-time manufacturing partner of Western Digital's (WDC) - Get Reportrecently-acquired SanDisk unit, has hiked its operating profit forecast for the fiscal year ending in March to about $1.7 billion. Not surprisingly, the company cited strong NAND demand, and added that market conditions are expected to remain favorable for the rest of the fiscal year.
This comes after Western beat its calendar Q3 estimates -- the company had already hiked its guidance for the quarter in September -- and issued above-consensus Q4 guidance, while reporting it's seeing very strong flash demand. The company also forecast on its earnings call NAND industry bit production will grow by about 45% next year, better than 2016's estimated 35% growth.
Before that, DRAM and NAND maker Micron(MU) - Get Report beat August quarter estimates and offered above-consensus guidance. The company is benefiting from both improving DRAM and NAND demand, and forecasts long-term annual NAND bit demand growth will be in the low-40s range.
Industry data also points to burgeoning NAND demand. In October, prices for 64-gigabit (8GB) multi-level cell (MLC) NAND chips topped $3 for the first time in two years. Such a surge is unusual, as manufacturing process advances improve memory densities and lower per-gigabit production costs over time.
And though prices and demand were weak earlier this year, chip industry analyst Handel Jones forecasts NAND industry revenue will grow 6.2% in 2016. And he sees pricing remaining stable in 2017, something that would pave the way for strong revenue growth given expected bit demand growth. One caveat: Predicting where memory prices will be more than a few months out is a very tricky exercise.
What's driving the NAND rebound? Apple's (AAPL) - Get Reportrecent decision (coinciding with the iPhone 7 launch) to double iPhone storage capacities across all models and price tiers is certainly a big help. As are storage capacity hikes for new phones launched by Samsung, Huawei and various other Android vendors.
These capacity increases wouldn't be happening if there wasn't real consumer demand for more storage. Higher-resolution photo and video-recording modes, features such as Apple's Live Photos, growing uptake for music subscription services supporting offline downloads and the arrival of subscription video services supporting downloads -- YouTube Red and Amazon Video are two examples -- all seem to be contributing.
Then there's solid-state drive (SSD) demand: It's growing within the notebook market as consumers and businesses become aware of the performance, weight and form factor benefits of SSDs relative to hard drives, and perhaps even faster in the data center as enterprise and cloud app workloads get moved to SSDs. Storage giant EMC has predicted that virtually all enterprise workloads will move to SSDs in a few years' time.
All of that is buoying NAND shipments and prices, and also indirectly benefiting DRAM makers. The top three DRAM producers -- Samsung, Micron and SK Hynix -- are also NAND producers, and strong demand for one memory type makes them less willing to shift capacity to the other.
Chip equipment makers such as Applied Materials (AMAT) - Get Report, KLA-Tencor (KLAC) - Get Reportand Lam Research (LRCX) - Get Reportalso get a boost, as strong DRAM and NAND demand could incentivize memory makers to up their capital spending. While NAND capex has been healthy as manufacturers ramp production of next-generation 3D NAND flash lines, DRAM capex has been pressured in the wake of big price declines in 2015 and early 2016. Axcelis (ACLS) - Get Reportis a small-cap chip equipment maker with strong memory exposure.
In the short-term, Western and Seagate's (STX) - Get Reporthard drive businesses benefit from strong NAND pricing, as it boosts the delta between SSD and hard drive prices (on a per-gigabyte basis) and can make some potential SSD buyers think twice. Moreover, hard drive demand has been buoyed by a moderate stabilization in PC sales and strong orders for high-capacity drives by cloud giants. Seagate hiked its calendar Q3 guidance last month, and subsequently delivered a healthy earnings beat.
But the strong SSD demand that's contributing to NAND price gains has to give some pause. Particularly since much of it revolves around the data center, where SSDs have been rapidly cannibalizing sales of high-margin, performance-optimized enterprise hard drives. And as production of dense, low-cost, 3D NAND chips surges next year, NAND makers will have more room to cut prices without damaging margins -- which in turn will make SSDs more appealing to cost-sensitive PC and enterprise server/storage buyers.
Seagate, which unlike Western has chosen to merely partner with a NAND maker (Micron) rather than buy one, is particularly vulnerable here. Flash has encroached on hard drives at a faster-than-expected rate in multiple markets, and there are good reasons to think that trend will continue.