Macro weakness, the demand-supply imbalance, intense competition and declining selling prices lowered Micron Technology’s (NASDAQ:MU) top line growth and impacted its profitability in 2012. However, increasing consolidation in the industry, rising demand from non-PC markets, and improving memory product prices returned this leading memory products manufacturer to profitability in fiscal 2013.
DRAM memory product prices declined drastically in 2011 and 2012, after increasing by 28% in 2010, due to the impact of excess manufacturing (so-called fab) capacity. However, the DRAM average selling price (per Gb) increased approximately 10% in 2013 as strong demand in high growth markets allowed for the absorption of the excess capacity and restricted supply, which in turn led to higher memory products prices.
We believe that the DRAM memory product prices will continue to decline, though at a lower rate, for the rest of our review period. Our price estimate of $22 for Micron is at a 15% discount to the current market price.
- Two Scenarios That Can Change Our Valuation For Micron
- A Look Into Micron’s Poor Operating Performance In Q3’16
- Micron’s Q3’16 Earnings Review: Cost Saving Program & Increased Competitiveness Position To Cut Losses In 2017
- Why Brexit Will Not Have A Significant Impact On The Semiconductor Industry
- Micron’s Q3’16 Earnings Preview: Focus On Investment Priorities Will Pay Off Soon
- Why Micron’s DRAM Business Will Continue To Grow Despite The Declining DRAM Prices
Why DRAM Prices Stabilized In The Last Few Months?
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 shifted away from commodity DRAM production, buyers started 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 resulted in an upsurge in DRAM product prices in the last few months. Samsung, which is the largest DRAM manufacturer, had increased its mobile DRAM production (by 30,000 wafers per month) 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.
– In September 2013, a significant fire at SK Hynix’s Chinese fab damaged equipment and left the plant offline. Hynix accounts for 25.7% of the DRAM market and the temporary disruption in its operations led to a shortage in DRAM supply, which increased DRAM prices by 19% in September 2013. 
Factors That Will Put A Downward Pressure On DRAM Prices In The Future
We believe that the upward trend in DRAM prices 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.  The contract prices of dynamic random access memory (DRAM) began to decline in January 2014. 
Below are some factors that contributed to the decline in prices –
– Restoration of operations at Hynix: As SK Hynix fully recovers and gets back to production, the supply situation will ease in the industry. SK Hynix’s DRAM shipments were expected to increase by 20% in Q1 2014. 
– Increasing mobile DRAM sales: While commodity DRAM prices have been rising, the average price for mobile DRAM has been declining. Mobile DRAM prices declined sequentially by 15% in Q1 2013 (calendar year), the second largest drop in the preceding six quarters. The downward trend continued with contract prices declining 5-10% in January 2014. Currently mobile DRAM accounts for approximately 30% 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. 
DRAM business is cyclical in nature characterized by prominent oversupply and undersupply cycles. Currently, the industry is transitioning from an undersupply to oversupply situation. However, Micron claims as supply dynamics in the industry improves, the higher demand will stabilize the decline in selling prices.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 [↩]
- Computer memory prices declined in the first half of January, KitGuru, January 16, 2014 [↩]
- Here’s Why Competition in the DRAM Industry Will Intensify in 2014, The Motley Fool, March 19, 2014 [↩]
- DRAM, NAND prices rise amid shortage, The China Post, June 4, 2013 [↩]