Investors welcomed news from Micron Technology (MU 0.02%) that they had developed, along with Intel Corp. (INTC -0.05%), a next-gen memory technology that doesn’t use the traditional transistor architecture. Micron popped 9% on the news as the new memory claims to be 1,000 times faster than traditional NAND and 10 times denser than current DRAM. While impressive, a look into the details reveals investors may be getting ahead of themselves as the technology isn’t likely to drive financial results in the near to medium future.
A product without a market?
The new “XPoint” technology is impressive as it is an entire change in the architecture of the chip, not using traditional transistors but instead using a property change in the material itself. This is important as traditional memory based on transistors has a physical limitation. Memory manufacturers have been able to make denser memory by shrinking the transistor size, packing more of them onto a single chip or wafer. But they have always known they will eventually reach a limitation of how small these transistors can be, which is why they have been investing in 3D NAND and other technologies such as XPoint.
The new XPoint technology has properties that make it sit right in-between traditional NAND and DRAM. It will likely be costlier than current NAND and slower than DRAM. Computers and mobile devices are built to use both DRAM for “scratch-pad” memory and NAND for storing files and data. Since this new XPoint memory does not excel in either cost or speed, it is not going to be replacing either one of these two main types of memory, something both companies admit to.
In other words, because current computers and mobile devices are built to use the best qualities of both DRAM and NAND, it seems XPoint may be a "solution in search of a problem." Currently the only applications analysts see XPoint being used for are enterprise applications and in-memory databases where speed is essential so it is helpful to bring the data close to the processor and remove bottlenecks. Granted, over time the best properties of XPoint may be harnessed for new applications and uses, or the cost will come down, but this will take months or years.
Industry fundamentals are not changing.
I think investors got particularly excited about this announcement because it differentiates Micron’s portfolio, potentially adding a product that nobody else on the market currently has. This gives investors hope that Micron may some day not be in a purely commodity business and can break free from the frustrating boom-bust cycle all memory manufacturers must deal with. Adding to this hope was Micron’s statement that this technology would be ready in the next few quarters, showing up in products by 2016 as it doesn’t require a huge amount of retooling or new aspects of manufacturing.
Unfortunately, even if this were true, it is not clear there is a huge demand for this type of memory yet. Traditional transistor NAND and DRAM will remain the bread-and-butter of Micron and the industry for the next few years. This in turn will continue to be driven by the supply and demand of the two commodities.
The industry is increasingly looking like it is peaking with indications of a supply glut forming. Further, the demand side isn’t looking too hot in the near-term either. PC shipments declined 9.5% in the second quarter of 2015 according to Gartner. Most companies have already upgraded their computers after the end of XP, and it isn’t likely we will be seeing an uptick due to Windows 10 until late 2016. Also, according to Gartner, tablets are expected to continue to contract as the market is completely saturated and people are holding on to their devices longer. The mobile phone market is only expected to grow 3.3%, largely driven by a slowing in China which is also looking increasingly saturated.
In conclusion, Micron and Intel should be applauded for such a revolutionary breakthrough in memory technology; and we could see some interesting use cases for the new memory down the road. But while this is good for the company's’ competitive positioning in the long-term, investors shouldn’t get too excited in the short- to medium-term as Micron’s profits and stock will continue to be dominated by the industry supply and demand cycle.
