Micron Technology (NASDAQ:MU), a leading manufacturer of memory products, has seen its stock climb by approximately 180% since the start of 2013. Improving market dynamics, rising demand, the acquisition of Elpida Memory and stabilizing NAND and DRAM prices are some of the key factors responsible for the positive sentiment around the company.
Deriving over 90% of its valuation from DRAM and NAND products, Micron’s stock price is highly sensitive to any adverse changes in memory product prices. Prices of memory products declined drastically in the last few years, due to the impact of excess manufacturing (so-called fab) capacity in both segments. But pricing in both segments has improved significantly in the last few months. Strong demand for DRAM and NAND products in high growth markets for Solid State Drives, Tablets and Smart Phones, has allowed for the absorption of this capacity and caused restricted supply. And this in turn has led to higher memory products prices.
Given the unpredictability and cyclicality of memory product prices, we maintain a cautions outlook for Micron. We believe that prices will continue declining in the future, albeit at a slower pace. Our price estimate of $14.68 for Micron is at a 20% discount to the current market price of $19.
Commodity DRAM Supply Shortage Is A Short-Term Trend
In light of declining PC sales and rising demand for mobile devices, the DRAM industry is witnessing a shift in manufacturing capacity away from PCs to higher growth segments such as mobile handsets, tablets, servers, automation and networking. With the market shifting from traditional desktops and laptops to mobile devices and embedded computing systems, less fabrication facility capacity will be allocated to commodity DRAM manufacturing.
As capacity shifts away from commodity DRAM production, buyers are building up their inventory to avoid any potential supply shortage in the future, especially since the decline in PC sales appears to be troughing. This has resulted in an upsurge in DRAM product prices in the last few months. Samsung, which is the highest DRAM manufacturer, has increased its mobile DRAM production due to better than anticipated demand for the Galaxy S4 and other Smart Phones and Tablets.
Here are some other recent events that contributed to the rise in DRAM prices:
- The 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. Because semiconductor manufacturing requires such extreme precision, resetting production takes time and this limits supply.
- Fire at SK Hynix’s factory led to a shortage in DRAM supply which increased DRAM prices by 19% in September 2013. 
Improving market demand combined with more Inotera volume being sold into higher value segments led to a 16% and 5% sequential improvement in Micron’s DRAM ASPs in Q3 and Q4 2013, respectively. Although 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.  Once Hynix recovers full capacity production next year, DRAM pricing is expected to drop by 30% or more.  The resulting increase in supply could well be match with a seasonal decrease in 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 the 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, as the result of restricted supply and rising demand. The rising global mobile shipments (smartphones and tablets), increasing demand for SSDs and higher memory content in these devices are the most important trends driving current demand for NAND Flash products.
Apple is consuming almost 50% of the NAND production of the capacity of major manufacturers (SK Hynix, Toshiba and SanDisk.  Additionally, Micron and Intel are utilizing their capacity to manufacture their own brand-name SSDs. Samsung remains the largest producer of NAND memory.
While demand is rising, suppliers have been more disciplined with new investment in fab capacity, as per IC Insights.  Though manufacturers are upgrading equipment to handle smaller process geometries in chip production, there is at present less interest in investing in new capacity in terms of wafer starts.
We forecast NAND prices to decline by 5% in 2013. 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.Notes:
- Earnings Preview: Micron Technology, Seeking Alpha, September 24, 2013 [↩]
- Contract DRAM Price Growth Slows in the Second Half of April, Xbit Laboratories, May 9, 2013 [↩]
- Micron: Overvalued? No, The Stock Can Still Go Higher, Seeking Alpha, November 3, 2013 [↩]
- Beset by Ails, Mobile DRAM Underperforms in Q1, iSuppli, July 2, 2013 [↩]
- DRAM, NAND prices rise amid shortage, The China Post, June 4, 2013 [↩]
- NAND flash prices stabilize as demand grows, Digi-Key, May 3, 2013 [↩]