It's been a long winter for Micron Technology (MU +3.03%) and the market for dynamic random-access memory (DRAM) chips. Prices have been plunging all year as supply overwhelmed demand. In Micron's fiscal 2019, which ended in August, the company saw average per-bit selling prices for DRAM chips drop 30% from 2018.
This difficult pricing environment has wreaked havoc on Micron's bottom line. The company's adjusted earnings per share plummeted by 84% in the fourth quarter compared to the prior-year period, and its guidance called for even lower earnings to start fiscal 2020.
Image source: Micron.
Price declines are slowing
Although DRAM prices are still trending lower, those price declines have started to slow. According to analysis from TrendForce, contract prices for DRAM chips will decline by just 5% in the fourth calendar quarter compared to the third quarter. That compares to declines in the 20% to 25% range earlier this year. TrendForce also expects pricing to slump by a low-single-digit percentage in the first quarter of 2020.
TrendForce sees the potential for DRAM prices to stabilize and recover in 2020, driven by improving inventory levels at suppliers. Micron's own inventory has ballooned during the current downturn, and it will take time to bring it back down to normal levels. In Micron's fourth quarter, despite a 43% year-over-year decline in revenue, inventory was up 42%.
While Chinese DRAM companies are starting to produce DRAM chips, TrendForce doesn't see this affecting the 2020 recovery. Chinese vendors aren't expected to contribute much to the global supply in 2020, although the story could change in future years as the industry ramps up.
Well-positioned
Alongside this pricing news, analysts at Mizuho boosted their price target on Micron Monday morning from $53 to $56. Mizuho sees Micron as well-positioned in 2020 to reap the benefits of improving market conditions.
Mizuho expects inventory improvements, stabilizing chip prices, and stronger demand related to 5G and data center to drive Micron's results next year. It maintained its buy rating on Micron stock.
While DRAM prices are on their way to bottoming out, there's no guarantee prices will rebound strongly anytime soon. Since 2005, Micron has experienced only four years of rising DRAM prices, and two of those years were 2017 and 2018. A big jump in prices would require widespread shortages, which certainly won't happen until inventory levels come down.
Still, if Micron's profits bottom out in positive territory, that would mark a distinct shift from previous cycles. The company generally loses money when times get tough, but it's managed to maintain profitability this time around. At least so far.
There's still a cloud of uncertainty hanging over 2020. The trade war between the U.S. and China is ongoing, and a recession for the U.S. and other major countries remains a possibility. A deterioration in the macroeconomic environment could derail the demand side of the equation for the DRAM industry, preventing a significant rebound in prices, or even prompting further declines.
But for now, the brutal price declines of 2019 are giving way to much gentler price declines. That's good news for Micron.
