Micron (MU) Should Buy Pure Storage (PSTG) - Susquehanna

Susquehanna analyst Mehdi Hosseini notes #Micron Technology's (NASDAQ: MU) new CEO Sanjay Mehrotra is expected to place stronger emphasis on moving "up the stack" by bolstering MU's system solution/firmware. The analyst argues an acquisition of #PureStorage, Inc. (NYSE: PSTG) can enable this strategy, which would be accretive in one to two years. He comments: "MU's hiring of Sanjay Mehrotra (former CEO of SanDisk) makes sense to us, given his rich background in the NAND industry. While DRAM accounts for ~60-65% of MU's revenue (and >65% of total OP), it is Mehrotra's NAND background and experience that could position MU for long-term secular growth - which is all on the NAND side! However, we believe Mehrotra's efforts to cultivate a higher-value solutions offering at SanDisk prior to its acquisition by WDC should not be overlooked. We contend that an aggressive move "up the stack" by MU may be what it needs to alter the narrative from being a cyclical component vendor heavily exposed to DRAM to a vertically integrated storage solutions provider, much the way our top pick WDC (Positive, $140 PT) is positioning itself in the nascent and fast-growing Data Center Solutions market ($23B TAM by 2020). As such, we view the strategic rationale of a vertically integrated play as a compelling argument as MU positions itself for the next generation of cloud infrastructure while (reinvented) incumbents like NTAP pursue the consolidation strategy. Moreover, as we noted in our storage system initiation report (link), proprietary HW margins are under pressure, as hyper-scale cloud customers push for a stoppage of "margin stacking." In this light, we argue that Positive-rated PSTG ($15 PT) would be an attractive target for MU, given: 1) PSTG is a first-mover in the growing All-Flash Array (AFA) space with a market-leading cost structure (~65% product margins) that can be vertically integrated to extend cost leadership, 2) PSTG's expertise in firmware and system software can be leveraged to help MU strengthen its SSD product portfolio to better compete with WDC, Intel, and Samsung, and 3) as illustrated in Figure 1, we contend such a deal can be accretive by ~$0.25 in CY19, depending on various scenarios around mix of equity/cash. All in all, the addition of PSTG would be a good first step in changing the narrative on MU, and consequently its valuation multiple - which we believe is plagued by a broader underappreciation of Memory industry multiples, as per our 5/5 note."
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