Increasing DRAM Prices Signal Stronger Growth For Micron In 2017

For most quarters in fiscal 2016, Micron (NYSE:MU) suffered operating losses as the demand for DRAM decreased due to lower PC shipments, while the supply of DRAM increased. (Fiscal year ended with September 1st.)  However, DRAM prices rebounded in the second half of 2016 because of increasing memory content in mobile devices.  Accordingly, major vendors reduced their production mix in favor of mobile DRAM, which led to an under-supply condition in the PC DRAM market. It is worth noting that in June 2016, Samsung, which held 47% of the global DARM chip market in Q2’16, announced a reduction in the DRAM investment in favor of NAND flash in June 2016. These factors helped Micron post positive operating income in Q1’17.

DRAM And NAND Demand Likely To Outpace The Supply In 2017

Micron expects DRAM supply growth to remain around 15%-20%, as it doesn’t expect suppliers to add significant wafer capacity. Moreover, Micron expects the DRAM demand growth to range between 20% to 25%, outpacing the supply growth. This factor is likely to contribute to improvements in DRAM ASPs in 2017.

We believe that the PC DRAM revenues, which contributed around 20% of the DRAM revenues for Micron in Q4, are likely to remain on an upward trajectory in the near term. This is because the PC market seems to be better-positioned going ahead, due to an improvement in the inventory levels, stronger business demand and a sequential decline in the prior year comps arising from the expiration last year of the free Windows 10 upgrades. The stabilizing PC market is likely to translate into higher revenues and improved margins for Micron going ahead.

Micron expects the NAND demand to outpace the supply growth. Micron expects the future NAND demand growth to remain in the range of 40%-45%, outpacing the supply growth of 30%-40%. This should translate into higher revenues and profits for Micron.

Newer Technologies To Reduce Dependence On Highly Cyclical And Commoditized DRAM

Though price improvements in DRAM and NAND prices can help Micron in the near term, the high demand and low supply conditions have tended to be transient as the industry is cyclical. Supply levels are likely to increase in the long run, exerting downward pressure on prices of both DRAM and NAND.  At various points in time, this can affect Micron’s results too.

However, the company is focused both on ramping up the production of first generation (Gen 1) 3D NAND and TLC (triple level cell) flash and on commencing the production of its second generation 64 layer 3D NAND. Micron believes that ramping 3D and TLC production will deliver 22% to 25% cost per bit improvement in fiscal 2017. Additionally, the company expects the recently closed Inotera acquisition to continue to strategically benefit it going ahead. Furthermore, Micron is planning to start the sales of its SSDs based on the 3D XPoint technology in the second half of 2017. This should help the company to reduce its dependence on the highly cyclical and commoditized DRAM market.

We are in the process of updating our model for Micron.

See our complete analysis for Micron here

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