Everspin vs. Micron: MRAM is better than MU on a few major metrics (MRAM) (MU)

Futuristic concept of high tech computer network with artificial intelligence

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These are unprecedented times with inflation soaring for decades. There is also uncertainty about demand while supply chain problems persist as China tries to tame Covid infection rates.

Moreover, with the United States determined to retain its superiority For advanced artificial intelligence or AI processors On China and prioritizing the importation of manufacturing, the industry is unlikely to develop in the same way as before.

Under these conditions, the aim of this thesis is to show that instead of selecting Micron (Nasdaq: MU) To buy by dipping, a better strategy is to choose Everspin Technologies (Nasdaq: Maram) whose details are shown below provided better price performance for one month.

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Key metrics comparison (callingalpha.com)

Chances are you’ve probably never heard of this stock that has a market cap about 500 times less than Micron, but it definitely deserves your attention, not because of its high revenue growth or gross profit margins, but more because of its MRAM which is a technology that offers some advantages over DRAM. Produced by Memory Giant.

I’ll also use some lessons from the 1980s when there was a paradigm shift in the semiconductor industry, but first, I’ll explain what MRAM is and it’s also Everspin tape.

Advantages of Everspin MRAM over DRAM

First, MRAM, short for Magnetic Resistive Random Access Memory, uses the motion (spin) of electrons to move data rather than charge it as is the case with conventional memory or DRAMs made by Micron.

One of the advantages of MRAM is that it allows data to be processed in parallel on the same chip, making it faster while also reducing power consumption. It is also a non-volatile memory, which signifies that data does not need power or electrical energy to remain usable, like traditional hard disk drives and SSDs do. This feature provides longer endurance than DRAM or NAND flash memory.

In this regard, Everspin, far from being a startup, has more than 12 years of experience in producing MRAMs, which are used in data centers and the Industrial Internet of Things or IoT as described below.

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View MRAM investor presentation slides (callingalpha.com)

However, MRAM, while rapidly gaining adoption, is not as popular as Micron’s DRAM (or Dynamic RAM) due to its low resistance which prevents it from taking advantage of the power savings of standard electronic circuits. A solution has now been found by researchers at Samsung Electronics (OTCPK: SSNLF) who have addressed the problem by designing a new MRAM matrix chip for AI processing purposes.

Without going into too much detail, they prove that an MRAM chip can be used for in-memory computing since the processing takes place within the memory network itself. This differs from standard computer architecture where data is stored in traditional memory chips such as those produced by Micron and with computing done in discrete processor units such as those produced by Intel (INTC). Thus, this development opens up new areas of application in the next generation of AI chips, as MRAM moves to the point of challenging tasks that were traditionally accomplished with Micron’s DRAMs.

Micron’s DRAM and DDR5 limits

However, Micron continues to innovate, and last year the company outpaced its competitors by developing a more advanced DRAM processing technology, called 1α (1-alpha). It offers improved performance and energy efficiency, but, the 1α was all about the manufacturing ingenuity that enabled faster production and shipping.

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Micron Products (www.micron.com)

Moreover, as described above, the company is developing the latest generation of DDR5 memory modules that offer higher density. This basically means that in the same server or PC you can fit four times more memory than previous generation DDR4 memory.

However, as a result of high inflation and technological changes, the practice of upgrading hardware after each new software release by suppliers is no longer reliable, except for special events such as the holiday season. One such example is the new optimization features in Microsoft (MSFT) Windows 11 compared to the older Windows 10 version, which makes it possible to run more applications with the same memory, which implies fewer hardware upgrades.

Returning to DDR5, its performance (measured as bandwidth) also saw a 36% increase, but there are questions about the response time that has not increased according to an article in PC World, compared to DDR4.

This latency issue leads to memory bottlenecks especially in demanding AI applications because it limits the acceleration of data from the processor to the memory. Now to circumvent this problem, there is HBM technology, but this constitutes more of a workaround than a permanent solution. Therefore, with new alternatives such as in-memory computing using MRAM now available, DRAM should be replaced by MRAM for the relevant use cases.

So, in addition to uncertainty about demand, Micron faces headwinds from technology-led developments that will likely make its chips less attractive compared to MRAM.

Compare profitability and valuations

Looking further, Everspin is more immune to the woes of the consumer market as its products are used in a wide range of specialty industrial applications as described below.

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Everspin customer categories and IP (callingalpha.com)

Moreover, this is a competitive sector, as in addition to Samsung, other companies such as Honeywell (HON), Toshiba (OTCPK: TOSYY), and Siemens (OTCPK: SIEGY) have also invested in MRAM. However, some of the most notable developments have come from smaller companies like Everspin which, as a result, now has an IP portfolio consisting of more than 650 patents, with some of the companies using it pictured above.

Now, in order to maintain its lead, the company has a relatively high R&D budget, which partly explains the lower EBIT (operating interest) margins for Micron as shown in the table below. On the other hand, its higher gross margins despite not having the benefit of a huge revenue base like Micron to spread its fixed costs on, also indicates better production efficiency. For that matter, Everspin has a partnership with US-based Global Foundries (GFS) for manufacturing purposes.

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Key metrics comparison (callingalpha.com)

Everspin also has a better return on capital and a better free cash flow margin, but more importantly, since its revenue growth measure is three times that of Micron, it is abnormal for it to have a lower subsequent sales price multiple of only 1.93 x. Thus, it should value better, and adjusting for a P/S of 2.13x, I get a target of $6.68 ((6.07 x 2.13)/1.93)). I’m also optimistic because Everspin has a backlog that could help it mitigate the effects of the recession, while Micron has high inventories.

The $6.9 target is well below Wall Street’s $9 target but is justified by uncertainty about the pace of the Fed’s rate hike. In this regard, higher rates lead to tightening of monetary conditions in their wake and are particularly detrimental to technology stocks as in such economic conditions it becomes more difficult for them to maintain higher growth rates compared to the “more valuable” rates.

A glimpse into the eighties

The current economic situation is somewhat similar to the late 70’s and early 80’s when Paul Volcker, who was the Chairman of the Federal Reserve at the time, was aggressively raising interest rates to tame inflation which led to a high level of demand destruction. Focusing on the semiconductor industry, after an initial rally in 1979 and the first half of 1980, memory prices began to decline rapidly due to overcapacity generated by industry-wide capacity investment, as well as sluggish demand caused by global recession fears. At that time, Intel, which was mostly a memory company and suffered a lot, could only recover thanks to innovation through the development of the i386 processor.

Today, Everspin innovation is on the cusp of technological change.

As for Micron, it not only makes memory for computers, but also for data centers, smartphones, cars, and industries. It’s also the only US supplier of semiconductor memory and storage after Intel sold its memory module to SK Hynix in 2020. However, it’s not as diversified as Samsung which operates in many industry segments, and in case of any brutal fall in demand , it will be difficult to absorb shock.

It’s worth noting that Everspin isn’t competing with Micron, which instead faces the likes of Samsung and SK Hynix for DRAM memory while in NAND or flash memory, there are many other competitors. Also, with a market cap of only about 130 million, Everspin doesn’t have the scale to emulate Samsung’s MRAM research, but it can certainly leverage its intellectual property assets.

Continuing on a positive note, the company’s Spin Transfer Torque MRAM (STT-MRAM) is facing more demand since “it is questionable whether DRAM will continue to expand and meet the needs of next-generation systems” such as big data and internal memory computing for AI. To that end, the Everspin STT-MRAM business for data center applications grew rapidly and accounted for 19% of revenue in the third quarter of 2022, or a 23% progression over the same period last year.

conclusion

This growth should continue due to Everspin’s advantageous position in the MRAM market which is expected to grow at a compound annual growth rate of 32.7% between 2020 and 2027. It recently signed a contract with QuickLogic (QUIK) for Department of Defense and Aerospace System requirements.

Thus, this thesis made the case for investing in Everspin based on the superiority of its MRAM. As for Micron, despite its key role in bringing supply chains back on the ground to American soil with its $100 billion New York plant, it is best to avoid buying the dip not only because of slumping demand but also because high inflation and technological development raise doubts. Regular DRAM upgrade cycles.

Finally, while we tend to focus on demand and inventory, it’s a combination of technology-driven factors that are driving paradigm shifts in the semiconductor industry. Still, Everspin doesn’t have Micron’s financial clout and manufacturing prowess, but its MRAM is definitely attractive, and at around $6 the stock is a buy. Adding a note of caution, in the short to medium term technical stocks should be constantly affected by volatility.