Shares of memory chip manufacturer Micron Technology (MU +0.21%) tanked last Friday after the company's fiscal fourth-quarter report beat expectations but featured weak earnings guidance. While Micron's revenue is stabilizing, the company predicted a sequential decline in both gross margin and earnings per share for the first quarter of fiscal 2020. That outlook threw cold water on the idea that a robust recovery was right around the corner.
Micron's guidance suggests that it expects meaningful price declines to continue for at least the next quarter. However, recent data from market research firm TrendForce indicates that contract prices for PC DRAM chips have leveled off and are expected to remain unchanged for the next round of contracts.
That's good news for a company that saw its adjusted earnings per share crash 84% in the fourth quarter, although it does come with some caveats.
Image source: Micron.
Improving demand
The average contract price for an 8 gigabyte PC DRAM module was $25.50 in August, unchanged from July, according to TrendForce. While negotiations for the latest contracts aren't yet complete, TrendForce expects prices to hold steady.
This data is only for PC chips, not the chips that go into mobile device or servers, so it doesn't mean that DRAM contract prices are no longer declining overall. But after brutal price drops that have erased much of Micron's profitability, any sign of price stabilization is a good thing.
Unfortunately, these newly stable prices aren't necessarily being driven by increased end-market demand. TrendForce reported that OEMs have raised inventory levels in reaction to Japan's trade actions against South Korea and in an attempt to get out ahead of possible new U.S. tariffs set to go into effect in December. The extra demand that's stopped prices from falling may not persist, as OEMs won't be building inventory indefinitely.
In the longer run, TrendForce sees an improving price situation by mid-2020. The three major DRAM suppliers are expected to decrease their capital expenditures by 10% or more next year, leading to the smallest increase in DRAM bit output in the past decade. "The curb on the supply growth will set the stage for the general price rally in the middle of next year," according to TrendForce.
Still plenty of uncertainty
Whether this prediction comes to pass depends on demand, and demand could be derailed by a lot of different things. The coming end of support for Windows 7 has triggered an upgrade cycle in the commercial PC market, which has buoyed PC sales recently. This upgrade cycle will eventually end, which could reduce demand for PC memory chips.
Outside of PCs, the smartphone market continues to be weak, with tumbling unit volumes and little in the way of exciting new devices. Meanwhile, cloud IT infrastructure revenue actually fell in the second quarter, according to IDC, a sign that demand for server memory chips may remain muted for a while. And if a recession hits the U.S. or other countries in the near future, the demand environment could get much worse for Micron before it gets better.
TrendForce's data offers the first real sign that contract prices for memory chips are starting to find a bottom. Whether this is the true bottom remains to be seen.
