First, let’s start with the disclaimer: I own Micron Technology’s (MU) stock and have for about a year. At the beginning of 2009 I wrote that it was, to my mind, one of the best ideas on the table for this year. And, based on some recent reading, I’m beginning to believe that it may turn out to be one of the best investment ideas well into 2010 also.

No, I’m not suggesting people run out and buy it at current levels because in all likelihood you’ll have a chance to enter at better prices. I expect the stock will pull back 10% to 20% as the seasonal pressure on memory (DRAM and NAND flash) abates and holders book their profits. However, that’s not going to change the fundamental supply-demand imbalance that should last well into next year.

First, a little background on how we got here.

Several years ago the DRAM and NAND flash suppliers started adding capacity like drunken sailors (apologies to drunken sailors). In what amounted to a massive exercise in stupidity, nearly all these companies thought there was going to be a dramatic increase in demand led by overall economic growth, Windows Vista (MSFT), solid-state drives (SSD), and a multitude of other catalysts. It wasn’t uncommon on quarterly conference calls of semiconductor capital equipment manufacturers to hear that more than 50% of their orders were from memory companies.

As that additional capacity hit, the markets prices for DRAM and NAND went into free-fall. During 2008, contract prices for most DRAM parts dropped by about 60% while NAND flash contract pricing was down more than 70%.

The industry responded in typical fashion. First, it denied there was a problem. Then the various players insisted their unique capabilities and positioning would enable them to gain market share. Reality began to set in when we saw capital spending plans being cut by the middle of last year. But the depth of the cycle wasn’t reached until last fall when we saw business failures (Qimonda, Spansion) as well as actual capacity removed from the market -- permanently.

As with all commodities, supply and demand are the determinants of price and, sooner or later, if you take away enough supply, prices are bound to recover. Thus far this year we’ve seen most DRAM prices about double and NAND prices up closer to 150% with much of these gains coming since Spring. Obviously that type of change acts as a catalyst for the stocks and, for Micron, it’s up about 240% year-to-date.

Normally, I’d take that money and run at this point, but what was apparent early on this year was a structural change in the industry that isn’t going away anytime soon. Take a quick look at the table, which explains what I mean:


Click to enlarge

What I affectionately refer to as the “Sick Sisters of Memory” represents the five companies in Taiwan and Elpida (Japan). The Taiwanese represent about 15% to 20% of the industry (depending on whose estimates you use) and Elpida is another 15%, so roughly about one-third of the industry market share is represented.