How DRAM Pricing Declines Could Hit Micron

Micron (NYSE:MU), the world’s second-largest memory manufacturer, has seen its stock price decline by over 40% over the last six months, currently trading at levels of about $36 per share. The selloff has largely been driven by weaker prices for NAND memory and a projected slowdown in the market for DRAM, which has been responsible for much of Micron’s recent earnings growth. Below, we take a look at how Micron’s DRAM business could be impacted going forward.

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DRAM Has Been Biggest Driven of Micron’s Recent Growth

DRAM has been the biggest driver of Micron’s business, accounting for over two-thirds of the company’s overall revenues. The segment outperformed over the last two years, driven by demand from the cloud, enterprise, mobile, and graphics markets, and stronger sales to higher-value markets. Over 2018, Micron indicated that sales of its DRAM products rose 64%, with ASPs rising by 35% and volumes growing 20%. However, things could be cooling off, with the market entering a phase of oversupply. While there was a modest increase in prices over Q3 2018, contract prices have been seeing declines in October, and DRAMeXchange projects that the price of DRAM could decline by 5% or more in Q4 2018, ending a run of nine consecutive quarters of price growth.

Expect Sharper Declines In The Near Term

It’s likely that the price declines will be steeper going forward, with DRAMeXchange predicting a 15% to 20% year-over-year price decline in 2019. Moreover, unlike NAND chips, which see some price elasticity of demand, DRAM chips are relatively inelastic. This is because device manufacturers only need a certain amount of DRAM to meet performance requirements for systems that they may have worked on developing several quarters ago, and it’s unlikely that they will buy more DRAM taking advantage of the lower pricing.

Micron, for its part, is pushing ahead with its technology transitions to cut costs and improve the performance of its DRAM. The company has been increasing the output of 1x-nm chips, which have process node of between 10- and 19-nm, noting that sales of its 1y – nm chips – which likely pack in more transistors – could commence before the end of calendar 2019. That said, it’s unlikely that these cost reduction efforts will be enough to offset the impact of rapidly declining prices.

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