This column originally appeared on April 4 on Real Money, our premium site for active traders. Click here to get great columns like this.
While the steady migration in IT spending dollars towards public cloud infrastructures has become a major headache for traditional enterprise IT giants such as IBM (IBM) , HP Enterprise (HPE) and Dell EMC, it has been a boon for select chip, component and networking hardware firms servicing the cloud giants' ever-growing needs. But as the latter group's cloud sales have swelled, supply shortages and rationing have become a common occurrence.
Those shortages provide some context to a report that Amazon.com (AMZN) and Alphabet/Google (GOOGL) have joined the ranks of firms interested in Toshiba's (TOSYY) massive NAND flash memory unit. While it's unlikely that either company wants to own the business outright, a "strategic" investment could make sense at the right price. And it could also be a sign of things to come.
In the latest in a flurry of reports about Toshiba's attempts to unload its flash business, Japan's Yomiuri Shimbun reported Amazon and Google have taken part in the bidding process for the business, which analysts have estimated is worth $15 billion or more. "About 10 companies" are said to have taken part in the bidding to date.
The report follows one stating Apple (AAPL) and Broadcom (AVGO) are interested parties. Other rumored suitors include Western Digital (WDC) , whose SanDisk unit has a major flash manufacturing JV with Toshiba, along with South Korea's SK Hynix, Taiwan's Foxconn and private-equity firms Silver Lake and Bain Capital. Should the unit sell to a non-Japanese firm, as seems likely, the Japanese government reportedly prefers the buyer to be American, owing to national security worries.
It's worth remembering here that Yomiuri Shimbun's sources, along with those of other Japanese publications reporting on the sale process, are likely close to Toshiba, if not inside the company. Such sources naturally have an incentive to talk up the amount of interest shown in the business, in hopes of getting suitors to up their offers.
Also: While Amazon and Google's flash needs are large and growing, it's quite unlikely that either company (unlike Apple) could single-handedly consume all of the flash currently sold by Toshiba, or come close to doing so. Toshiba has been estimated to control about a fifth of a NAND market worth about $35 billion, and expected to see strong growth this year.
Thus in the event that Amazon and Google are eying Toshiba's flash business, it's likely to buy a minority stake. One that would let the companies guarantee a stable supply of NAND in the coming years, and the chance to procure it at reasonable prices via long-term contracts.
Between their massive data center buildouts -- done to support their cloud infrastructure businesses, as well as consumer services such as YouTube, Prime Video and Google Search -- and the steady cannibalization of hard drives by solid-state drives (SSDs), it's a safe bet that the amount of NAND used by Amazon and Google within their servers and storage systems will rise substantially over the next several years. Both Amazon Web Services (AWS) and the Google Cloud Platform (GCP) now provide clients with a number of computing instances that feature high-speed SSDs. Major production ramps for cheap/dense 3D NAND flash should help SSDs take additional share from hard drives in the coming years.