Memory chip manufacturer Micron Technology (NASDAQ: MU) is seeing its revenue and profits plummet as prices for its products rapidly decline. The company's guidance for the fiscal third quarter calls for a year-over-year revenue drop of almost 40%, and for adjusted earnings per share to plunge nearly 75%. Falling prices coupled with weak demand represents a perfect storm of bad news.
Micron expects the demand picture to start to look better in the second half of the calendar year, but pricing is another story. DRAMeXchange expects DRAM average selling prices to drop by 15% to 20% sequentially in the second calendar quarter, with another 10% sequential decline following in the third quarter that may bleed into the fourth quarter, depending on demand. When it's all said and done, 2019 will likely be the worst year for DRAM pricing since 2012, and maybe even the worst since the financial crisis.
Image source: Micron.
Prices go down, but not smoothly
One thing that's important to understand about the memory chip market: Per-bit prices never recover, other than short-term blips caused by undersupply. Per-bit memory chip prices go down over time. That's why PCs today may have 16 GB of random-access memory, compared to just hundreds of megabytes 15 years ago.
Knowing that, the past two years look like aberrations. In both 2017 and 2018, Micron enjoyed rising per-bit prices for DRAM, which supercharged its revenue and profits. That period of prosperity was never going to last, as I warned multiple times in the past couple of years. Any increase in per-bit memory prices is guaranteed to be undone sooner or later.
That's exactly what's happening in 2019. It's exactly what happened in 2015 and 2016, following an average selling price increase in 2014. And it's exactly what happened in 2011 after prices surged in 2010.
*2005 data for all memory chips, not just DRAM. However, DRAM represented the vast majority of total revenue in that year. **2019 estimate based on DRAMeXchange data and estimates. Data source: Micron. Chart by author.
Per-bit price declines are business as usual for Micron. What determines profitability is how per-bit costs change relative to those price changes. If prices fall by 10%, but Micron manages to reduce per-bit costs by 12%, margins will improve. If prices tumble 40%, and Micron only manages to reduce per-bit costs by 20%, margins will contract.
Unfortunately, Micron ended the practice of disclosing how its per-bit costs changed in late 2017, leaving investors in the dark. But it's safe to say per-bit prices are currently declining a lot faster than per-bit costs, given Micron's vanishing bottom line.
Investors hoping that Micron's prices will start rising again are probably going to be waiting a long time, at least until the next period of undersupply grips the industry. Given how much prices rose in the past two years, a long period of significant price declines looks likely. Micron's per-bit DRAM average selling price at the end of 2018 was roughly the same as it was at the end of 2013, with price increases in 2017 and 2018 gaining back all the lost ground since 2013. This pause in the downward march of per-bit prices is now very much over.
It's hard to say when price declines will moderate to the point where Micron will be able to reduce costs at a similar rate. It probably won't happen this year, barring a big surge in demand in the second half. Inventory levels, both at memory chip suppliers and at customers, are still elevated, according to DRAMeXchange, with slumping prices failing to ignite a recovery in demand so far. Things could get a lot worse for Micron before they start to get better.
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