The past 12 months for memory-chip manufacturer Micron Technology (MU 6.93%) have been defined by surging prices and blockbuster results. Particularly in the DRAM market, supply has fallen short of demand. As the price per bit that Micron was able to charge rose, the company's cost per bit sank, creating a perfect storm of earnings growth. In the latest quarter, net income of $2.7 billion was up by a factor of nearly 15 year over year.
The next 12 months are unlikely to be quite as good. Supply and demand in a commodity market can't stay so far out of sync forever, and Micron is already seeing NAND prices decline and DRAM prices grow much more slowly.
Image source: Micron.
Profits can still grow if Micron reduces its cost per bit at a faster rate, but the company has done something curious on that front. Beginning with the latest earnings report, Micron has stopped disclosing cost-per-bit changes, ripping it out of its quarterly slide deck without explanation.
This metric is also nowhere to be found in Micron's 10-Q. Whenever a company stops disclosing an important metric, I assume it's trying to keep investors in the dark.
Taking things away
Micron's results depend on three metrics: how many bits it sells, the average selling price of those bits, and cost of producing those bits. Prior to the latest quarter, Micron disclosed all of these metrics for both DRAM and NAND in its quarterly presentation. The image below shows what that looked like for the fourth quarter of fiscal 2017.
Image source: Micron.
Not only did Micron remove the cost-per-bit portion in its fiscal first-quarter 2018 presentation, but it also got a lot less precise with the other two metrics.
Image source: Micron.
Micron's bottom line depends on both average selling price and cost per bit. If the average selling price grows, margins can rise, as long as the cost per bit doesn't rise at a faster rate. If the average selling price declines, a steeper cost-per-bit decline can still boost profitability. Investors now only have half of the equation.
A healthy demand environment, for now
Micron CEO Sanjay Mehrotra said in the company's earnings call that he expects "a healthy DRAM industry supply and demand environment," which means that cost-per-bit declines will be greater than average selling-price declines. The company also sees "fairly healthy levels of cost reduction" in the NAND market going forward.
Here's the problem: Predicting future pricing in the memory-chip markets is hard. Micron can only guess what its competitors are going to do on the supply side, and the demand side depends on the performance of the PC and smartphone markets. If either does worse than expected in 2018, a healthy environment can quickly turn sour.
Judging whether or not the environment is healthy will now be more difficult for investors. My best guess is that cost-per-bit declines going forward aren't going to be very impressive. If they were, Micron would be eager to let investors know. Instead, it's pulling back on the information it's sharing.
Per-bit memory prices generally move lower over time. This past year was an anomaly. Between 2012 and 2016, Micron's NAND average selling price fell by at least 17% in each year. For DRAM, prices declined by a double-digit percentage in four out of five years, crashing 45% in 2012 and 35% in 2016. During times of steep price declines, there's no chance that cost-per-bit reductions can keep up.
The fact that Micron's business goes through cycles, and sometimes brutal ones, isn't a secret. That's the main source of risk when it comes to investing in the stock. It's impossible to say when the current cycle will turn, but one big red flag is the increasing vagueness of management. Sales volume and average-selling-price reporting is now inexplicably not precise, and cost-per-bit changes are no longer reported at all.
There's a reason behind these changes, and I doubt it's good news for investors.
