Micron Technology (NASDAQ:MU), like its peers, has to cope with the reality that computer memory prices -- after having been elevated for quite a while -- are now on the decline. Unfortunately for Micron, it would appear that contract prices for DRAM -- the memory product that makes up the bulk of the company's revenue and an even bigger share of its gross profit -- are declining at an even faster pace than expected. 

Let's take a closer look at what's going on.

Micron memory chips.

Image source: Micron.

A 30%-off sale

According to market researchers with TrendForce, contract prices for PC DRAM were expected to decline 25% sequentially in the current quarter but the actual drop was "nearly 30%." 

That, the researchers say, represents "the sharpest decline in a single season since 2011." 

According to Micron's analyst day presentation last year, 26% of the company's DRAM revenue in the first half of its fiscal year 2018 was PC DRAM. The remaining revenue was split between servers, mobile devices, and specialty applications, like networking and computer graphics. 

TrendForce also says that because the industrywide shortage of low-end PC CPUs is expected to persist through the third quarter of 2019, PC makers "are unable to carry out the consumption of DRAM chips under demand suppression." (Micron management did indicate that the company's business was being impacted by these CPU shortages during its December 2018 earnings call.)

Check out the latest earnings call transcript for Micron Technology.

It's not just PCs, though

Although TrendForce's report focused specifically on PC DRAM contract prices, the DRAM demand decline is by no means limited to this segment. During Micron's most recent earnings call, CEO Sanjay Mehrotra claimed that there are inventory corrections going on in other segments, including enterprise and cloud servers, as well as the industrial market. 

According to the executive, "This inventory adjustment period will contribute to weaker demand conditions in DRAM that will likely persist through the first half of calendar 2019." 

Mehrotra also explained that DRAM demand is being impacted by slackening smartphone unit shipments "particularly at the high end."

The comment about the high end is important because higher-end smartphones tend to have more DRAM content than lower-end smartphones, potentially exacerbating the impact on memory makers' businesses. To illustrate, a midrange smartphone like the Moto G7 has 4 GB of DRAM, while a flagship smartphone like the Huawei P20 Pro comes in configurations of 6 GB to 8 GB of DRAM -- up to twice the memory that a midrange device has. Lower-end smartphones can have even less than 4 GB.

Investor takeaway

The memory market is cyclical. Sometimes DRAM prices and profitability surge, and following those surges, there are often violent corrections. Indeed, although Micron generated $11.95 in earnings per share (EPS) in its fiscal 2018, analysts are only expecting the company's EPS to drop to $7.50 in fiscal 2019 followed by a further decline to $6.34 in the subsequent year. 

Those projected EPS declines aren't a result of poor execution on Micron's part -- in fact, Micron's technology position in DRAM seems to be improving -- but are instead the product of the reality that memory prices are on the decline and, with them, memory makers' gross and net profit margins.

TrendForce's report that PC DRAM prices dropped more than expected during the quarter isn't a thesis changer -- investors have already braced themselves for large DRAM declines -- but it's discouraging news nonetheless. The sooner that DRAM prices find a bottom, the better it'll be for Micron and other memory manufacturers.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.