We recently upgraded our price estimate of leading memory chip manufacturer Micron Technology (NASDAQ:MU) from $8.61 at the start of the year to $13.70 at present. The primary reason for a close to 60% change in our price estimate is the significant increase in memory product prices in the last few months. Deriving over 90% of its valuation from DRAM and NAND products, Micron’s stock price is highly sensitive to any adverse changes in the memory product prices.
Strong demand for DRAM and NAND products coupled with their restricted supply has eased pressure off memory products prices. As the supply of memory products is expected to remain constrained in the next few months as well, prices should continue improving.  In this article we discuss in detail the reasons for the recent improvement in DRAM & NAND ASPs and why we believe that prices will continue declining in the future, albeit at a slower pace.
Commodity DRAM Supply Shortage Has Led To Higher DRAM ASPs
In light of the declining PC sales and rising demand for mobile devices, the DRAM industry is witnessing a shift in market capacity away from PCs to higher growth segments such as mobile, tablets, servers, automation and networking. With the market shifting from traditional desktops and laptops to mobile devices and embedded computing systems, fewer components and raw materials were allocated for commodity DRAM manufacturing.
Here are some more supporting points -
- Samsung’s efforts to accelerate its mobile DRAM production due to better than anticipated demand for the Galaxy S4. Samsung has the highest DRAM manufcaturing capacity in the world.
- The recent earthquake that struck Taiwan drove up DRAM prices as major Taiwan-based memory module makers such as Rexchip, Winbond, Nanya Technology and Inotera Memories reported silicon wafer damage problems after the quake.
- Rumors of Apple launching two new iPhone variants this year and the company using 80% of Elpida’s mobile DRAM production capacity. 
As memory suppliers continue to shift capacity away from commodity DRAM production, buyers are building up their inventory to avoid any potential supply shortage in the future. This has resulted in an upsurge in DRAM product prices in the last few months.
Micron’s DRAM prices declined by 10% in Q2 2013 due to its higher concentration of sales in the PC market, which have lower per bit selling prices as well as lower per bit costs compared to other DRAM products. However, improving market demand combined with more Inotera volume being sold into higher value segments led to a 16% sequential improvement in DRAM ASPs in Q3 2013. With an improving product mix, Micron expects DRAM prices to increase by mid- to high single-digit sequentially in the current quarter. Based on the company guidance we estimate Micron’s DRAM prices to register a marginal increase this year. However, we estimate ASPs to continue declining over our review period, albeit at a slower pace.
Although the commodity DRAM prices are expected to continue rising for the rest of the year, we think that the trend might not last in the long run as the underlying cause for the current upsurge in prices is more due to the strategic move of OEMs rather than any fundamental change in market demand. 
Additionally, while commodity DRAM prices have been rising the average price for mobile DRAM declined sequentially by 15% in Q1 2013 (calendar year), the second largest drop in the preceding six quarters.  Currently mobile DRAM accounts for 28.5% of total DRAM shipments but its proportion is expected to increase in the future. Mobile DRAM has seen a steady decline in its price over time and the trend could continue in the future. With rising proportion of mobile DRAM in total DRAM shipments, the ASP of DRAM memory products can decline in the future. 
Rising Demand & Restricted Supply Have Stabilized NAND ASPs
On account of continuous improvement in manufacturing efficiency the average NAND price has declined significantly in the last few years, from $3.12 in 2008 to $0.83 in 2012. However, so far this year NAND ASPs have been relatively flat on account of restricted supply and rising demand. The rising global mobile shipments (smartphones and tablets), increasing demand for SSD’s and higher memory content in these devices are the most important trends driving current demand for NAND Flash products.
Apple is using almost 50% of the NAND production capacity of other major memory module makers SK Hynix, Toshiba and SanDisk capacity as it plans to launch new variants of the iPhone and iPad this year.  Additionally, Micron and Intel are utilizing their capacity to manufacture their own brand-name SSDs.
While demand is rising, suppliers are not building new fabs or increasing their manufacturing capacity to a great extent, as per IC Insights.  Though manufacturers are upgrading equipment to handle smaller process geometries in chip production they are not adding capacity in terms of wafer starts.
Micron’s average NAND selling prices in Q2 2013 were flat compared to Q1 2013. However, it saw prices climb by 8% sequentially in its fiscal Q3 2013. While Micron anticipates growing demand for SSDs and mobile devices to help gain momentum in NAND production and demand, it estimates NAND ASPs to decline by mid-single digits in the current quarter. A higher density product mix in NAND will lower both ASPs and cost per gigabyte while increasing volumes.
We forecast NAND prices to decline by 5% in 2013. However, with an improving macro scenario manufacturers will start building up their capacities to cater to higher NAND flash demand in the future. Thus, we expect prices to continue declining over our review period, albeit at a slow pace. The NAND flash market is estimated to be worth $52 billion by 2017.  We forecast global NAND flash shipment to reach 138 billion and ASPs to be close to $0.38 by 2017, which gives us a revenue estimate of $52-$53 billion (=$0.38*138) in line with market expectations.
Our price estimate of $13.68 for Micron Technology is almost in line with the current market price.Notes:
- DRAM, NAND prices rise amid shortage, The China Post, June 4, 2013 [↩] [↩] [↩]
- Contract DRAM Price Growth Slows in the Second Half of April, Xbit Laboratories, May 9, 2013 [↩]
- Beset by Ails, Mobile DRAM Underperforms in Q1, iSuppli, July 2, 2013 [↩] [↩]
- NAND flash prices stabilize as demand grows, Digi-Key, May 3, 2013 [↩] [↩]