Weak DRAM Demand & Declining ASPs Is A Temporary Setback For Micron

Leading memory chip maker, Micron Technology’s (NASDAQ:MU) stock has been on a downhill trajectory since the start of 2015, mainly on account of: 1) weaker-than-expected PC sales, in advance of the release of Windows 10; 2) adverse currency headwinds, as the company earns a sizable amount of its business overseas, especially Japan; and, 3) Micron’s own admission that its DRAM and NAND output (or “bit”) growth will lag that of the market in calendar year 2015, as it executes on key milestones in technology deployment and product introductions. In the last three months, the company has seen a steeper decline in its valuation, with its stock price declining by almost 45%. In addition to the above factors, which contributed to the weak investor sentiment, Micron has been hit by an oversupply situation and declining prices in the DRAM market.

The market for memory products is highly cyclical in nature, and the product prices are heavily dependent on the balance of demand and supply. In addition to the slowdown in PC sales in recent years, DRAM demand has been hit by rising competition and the increasing consolidation in the market.

While we agree that the weak PC DRAM demand and the ongoing decline in DRAM pricing will continue to impact Micron’s business in the short-term, we believe that the company’s long-term growth potential remains strong, as it increases its focus on other emerging segments.

See our complete analysis for Micron here

Despite The Consolidation, The Weak PC Demand Has Created An Oversupply Situation In The DRAM Market 

While the global DRAM market had numerous players a few years back, it is now essentially an oligopoly. As per Market Realistic, six companies are currently engaged in the production of DRAM chips in 20 facilities, down from 11 companies operating our of approximately 40 facilities in 2007. Samsung Electronics, SK Hynix and Micron are the top three DRAM players, accounting for more than 90% of the market. ((Why DRAM Pricing Is A Key Concern for Micron, Market Realist, July 10, 2015))

While the consolidation has reduced the DRAM supply in the market, the sluggish PC demand has led to a decline in DRAM demand. Demand has fallen faster than supply, creating an oversupply situation in the DRAM market. Though PCs’ contribution in the overall DRAM demand has declined considerably in the last few years, it still accounts for a significant portion of DRAM demand.

While PC sales have been on a continuous decline since 2012, the smartphone market has seen significant growth, and the increasing demand for mobile DRAM has worked to offset the decline in PC DRAM demand in the last few years. However, the smartphone growth rate has slowed recently. The Chinese smartphone market (the largest smartphone market in the world) declined year on year for the first time in six years, in Q1 2015. ^[1] Thus, in addition to PCs, the slowing growth in the smartphone market has impacted DRAM demand in the last two-to-three quarters.

Significant Decline In DRAM Prices Expected In 2015 & 2016 

DRAM prices had stabilized in the last two years on account of the growing smartphone and tablet demand. However, given the continued weakness in PCs and the slowing smartphone growth, prices are expected to decline significantly this year. The oversupply situation in the market puts a downward pressure on DRAM prices, and consequently manufacturers’ profit margins. Mobile DRAM offers lower margins as compared to PC DRAM, and thus the increasing proportion of mobile DRAM in total DRAM sales puts additional pressure on profit margins.

Research form Gartner expects the oversupply situation in the DRAM market to continue in 2016, leading to a 13.6% decrease in worldwide memory spending next year. ^[2] With Micron forecasting DRAM industry supply bit growth to be in the mid-20% range in calendar 2015 and in the low to mid 20% range in calendar 2016, DRAM prices will fall drastically.

To top it all, may analysts predict that the PC DRAM price weakness will spread to mobile DRAM, which commands relatively stable pricing at present. Samsung is the only producer of DRAM that makes a significant portion of its memory using 20nm fabrication technology. Finer manufacturing technology allows to make memory ICs smaller and cheaper, which allows Samsung to sell its memory at lower price points without affecting its gross margins. ^[3]

Shifting Focus on High-Growth Segments To Drive Micron’s Growth 

Micron is allocating less production to PCs and more bit production towards the other relatively stable long-term growth segments – namely mobile and cloud servers. While the PC market remains weak, Micron believes there will be a small net growth in bits into the PC segment by the end of the year.

At present, about 30% of Micron’s DRAM business is focused on PC’s, 25% on mobile applications, 20% on servers (enterprise & cloud data center servers), and the remaining on networking, automotive and industrial applications. We believe Micron will benefit from increasing its focus on other high growth segments, including mobile, servers and automotive applications. While the growth in mobile may slowdown in the near term (mostly on account of weakness in China) it still offers strong long-term growth potential.

The mobile and server segments are the fastest growing in terms of DRAM demand, with annual growth projected in the range of 30% – 50%. In addition to rising mobile shipments, the increasing content in smartphones (both high-end and low-end) will drive up demand for DRAM. Micron expects a 50% plus content growth in mobile in the back half of 2015 versus last year. ((Micron’s Management presents at Morgan Stanley Leveraged Finance Conference, Seeking Alpha Transcripts, June 4, 2015)) Micron claims that its server business also remains a very attractive segment with a demand profile that is less sensitive to price fluctuations in the market.

As Micron manages its product mix and distributes its capacity to a broad set of value added market segments overtime, it expects DRAM ASPs to stabilize overtime.

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1. China’s Smartphone Market Contracts Year on Year for the First Time in Six Years, IDC Press Release, May 10, 2015 [↩]
2. Gartner Says Worldwide Semiconductor Capital Spending to Increase 2.5 Percent in 2015, Gartner Newsroom, July 14, 2015 [↩]
3. Samsung putting pressure on DRAM prices, KitGuru, June 13, 2015 [↩]