A Look Into Micron’s Poor Operating Performance In Q3’16

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Micron Technology

Leading memory chip maker  Micron (NYSE:MU) posted a net operating loss of $27 million in Q3’16, which is significantly lower than the company’s operating performance in the same quarter previous year, when it posted a net operating profit of $631 million. Micron’s weak operating performance in Q3’16 was primarily because of a significant decline in its top-line and gross margins, which were negatively impacted by a steep decrease in the average selling prices (ASPs) of both DRAM and non-volatile NAND memory products sold by the company. The decline in the average selling prices of Micron’s DRAM products is largely due to continued weakness in the PC sector, resulting in an oversupply situation in the industry. However, the decline in the company’s NAND revenue is driven by the supply constraints caused due to technology transitions from planar NAND to 3D-NAND.

In the table below, we show how the company’s sales and gross margins declined, as a result of a decline in the ASPs of its memory products:

Screen Shot 2016-09-07 at 4.43.45 PM

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The Weak PC Demand Has Resulted In An Oversupply Situation

The market for memory products is highly cyclical in nature, and the product prices are heavily dependent on the balance of demand and supply. While the consolidation in the global DRAM market has reduced the DRAM supply in the market, the continued weakness in PC demand has led to a decline in the DRAM demand. 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. According to research firm Gartner, PC sales declined by approximately 5.2% and 9.6% in the quarter ending June and March 2016 respectively.

Due to the excess supply in the industry, as well as the increasing commoditisation of memory products, the ASPs of memory products sold by Micron have declined significantly in the last few years, at a CAGR of negative 24% between 2010 and 2015. Despite the fact that Micron is undergoing major technology transitions to generate stronger bit growth, we forecast DRAM prices to decline at a CAGR of 17% between 2016 and 2021. This is primarily because we believe that the memory market is the highly commoditised and prices rather than technology strengths are likely to govern the demand in this market.

See our complete analysis for Micron here

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