Micron (MU) rallied over the past three trading sessions, but this was mostly driven by weakening news at competing chipmaker Samsung (SSNLF) in the DRAM segment of the market. Things may change in the next couple quarters, as Micron attempts to rebalance its production to meet market demand, but indications of weakness over at Samsung may have triggered some hope that supply will contract with inventories among suppliers dropping leading to pricing gains.
Currently, there are comments circulating in the semiconductor industry that Samsung’s production of DRAM chips could come with defects according to Korean News outlets. While media reports of Samsung’s production defects might not be accurate, if it were to cause delays in shipments, some of that demand might translate favorably to Micron.
Currently, the DRAM market is forecasted to contract significantly with industry revenues of $103.6 billion versus prior-year industry revenue of $158 billion, according to UBS and SIA estimates.
The drop-off in memory industry revenues is driven by two factors:
- Lower pricing, $3.79 (average selling price) 2018 versus $2.31 ASP (UBS & SIA estimate) for 2019.
- Modest demand growth of 44.82 billion forecasted units for 2019 (in terms of GBs) versus prior-year forecasted units of 41.72 billion units (in terms of GBs).
- Industry revenues expected to drop by 34.4% mostly due to lower pricing as ASPs have declined per GB by 39% over the prior-year.
As of Q4’18, Micron’s market share in the DRAM segment was 23.5%, whereas Samsung’s DRAM market share was 41.3%. This implies that even a modest drop in Samsung’s market share due to production related issues could lead to a quarterly revenue surprise for Micron, as Micron’s absorption of memory production could translate to an additional $1-$5 billion in annual revenue, assuming Micron’s net-take of the industry were to improve by 1% to 5% market share in comparison to Samsung (though this a highly optimistic scenario). Historically, Micron’s total market share tends to hover between 22% of total industry revenues and 30% industry revenues, so a sudden improvement in market share isn’t exactly out of the question.
What’s more important to watch is memory pricing trends, which could trend considerably higher in the next couple quarters. Absent of memory pricing improvements, industry revenue will not improve. What may have started as a strong fiscal-year in 2018 translated into a weak fiscal year in the following year, as demand for memory tends to fluctuate. Whenever there’s too much production of memory chips, the pricing on memory chips tends to drop, which we have witnessed in the prior-quarter.
Historically though, the memory industry has trended between ASPs of $1.80 to $2.10 over the past 5-years leading up to 2017 and 2018 where pricing suddenly improved to $2.87 and $3.79, respectively. Keep in mind, the improvement in pricing coincided when there was a sudden influx of demand for GPUs, which may have drove pricing for memory tied to graphics cards. The sudden drop-off in memory demand, and industry woes coincided with the weakness in the graphics card market, and absent of a recovery in GPUs things might not bode as well for Micron in the current fiscal year.
Assuming, the entire industry does cutback on production (which has become increasingly likely) this could spark a shortage in memory chips, which would drive pricing much higher. Of course, the amount pricing would have to improve might not match the sudden price gains witnessed in 2018 or 2017.
Expectations on MU mostly revolve around pricing, but there’s very little indication of a massive increase in pricing that’s similar to those seen in the prior two-years. What might spark Micron’s momentum upwards is an industry-wide cutback on production, and with Samsung warning investors and announcing some cutback in production over the duration of the calendar year, the industry might recover on pricing. Of course, this would have to be an industry-wide effort, sort of like OPEC’s efforts to cutback oil production volumes, but with fewer players, and with less established market/demand scenarios to work off of. Even so, price collusion (whether inadvertent or not) would be welcome by Micron shareholders, as higher pricing tends to be the primary driver for top-line expansion.
Disclosure: The author has no position in MU. The information contained herein is for informational purposes only.
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