It has been a difficult year for Micron Technology (MU +4.04%). A slump in the memory market has knocked the wind out of the chipmaker's sales and margins in recent quarters, but things might start turning in the company's favor sooner rather than later.
The memory specialist recently got a shot in the arm as TrendForce data revealed that the price decline in the DRAM (dynamic random access memory) industry has slowed down. Fourth-quarter contract DRAM prices were down just 5% as compared to huge double-digit declines witnessed earlier this year.
What's more, TrendForce predicts that DRAM prices will decline in the low single digits once again in the first quarter of calendar 2020 and recover as the year progresses. This indicates that the sustained downturn in the memory market could be over in 2020. If that's indeed the case, now would be a good time to buy Micron stock, as it tends to do extremely well in a strong memory pricing environment.
Image Source: Getty Images
Memory prices could rebound in 2020
The memory market oversupply has been Micron's Achilles' heel. The spectacular decline in DRAM prices has absolutely decimated the company's top- and bottom-line performance. Micron's fiscal fourth-quarter results revealed a 42% crash in revenue, while non-GAAP net income fell a whopping 85% year over year.
Micron investors can now realistically hope for improved performance in the coming quarters, as memory industry participants have been actively trying to bring down the oversupply. DRAMeXchange estimates that Samsung is not going to boost its wafer production capacity in the first half of next year as it transitions to the next-generation 1z-nanometer DRAM technology.
The South Korean giant has already clarified that it will adjust its memory investments based on prevailing end-market conditions next year. Similarly, SK Hynix has also promised that it will reduce DRAM production in 2020 thanks to a significant cut in investments. Micron reduced its capital original expenditure budget by 13% in the recently concluded fiscal 2019. In fiscal 2020, the company will spend between $7 billion and $8 billion on capital expenses, down from the $9.1 billion it spent last year.
In all, Micron's prediction of DRAM demand exceeding supply in 2020 doesn't look far-fetched thanks to the supply actions outlined above. The company anticipates DRAM bit supply to increase in the mid-teens, while demand is expected to jump between the high teens and 20% range.
Better memory demand will be a tailwind for Micron
Weak DRAM demand for the better part of 2019 has weighed on memory prices and Micron's prospects. Intel's CPU shortage, a weak smartphone demand environment, and a decline in data center spending this year have contributed to the oversupply. Memory makers such as Micron were caught unaware by the sudden decline in demand and were left with excess inventory on their hand, causing a drop in prices.
The good news for Micron is that memory demand is finally coming back. DRAMeXchange reports that global DRAM revenue increased 4% in the third quarter of 2019, bringing an end to three consecutive quarters of sequential declines. Micron reportedly enjoyed a 30% jump in bit growth during the quarter.
The jump in DRAM demand during the quarter was driven by smartphone and server markets. This small uptick in DRAM shipments bodes well for Micron going into 2020, because a couple of key DRAM-consuming markets are expected to grow significantly next year.
The ramp-up of 5G smartphones, for instance, could help sustain the recovery in DRAM demand. According to Strategy Analytics, 5G smartphones could account for less than 1% of all devices shipped in 2019. But by next year, they are expected to account for 10% of overall smartphone shipments. Micron has already launched DRAM products aimed at the 5G smartphone space, so it should be able to take a nice bite out of this market next year.
The server DRAM market is also expected to pick up the pace next year. DigiTimes predicts that demand for servers will increase to the tune of 5% in 2020, since the ongoing inventory adjustments are almost over. What's more, the forecast says that server demand is all set to clock a compound annual growth rate of 6.5% through 2024 on the back of new data center deployments.
All of this indicates that the memory market could enjoy a far more favorable demand environment in 2020. Coupled with the improvements on the supply side of things, Micron investors can expect a price recovery next year.
This is probably the reason why a compilation of analyst estimates by Yahoo! Finance estimates a 21.5% jump in Micron's top line next fiscal year, along with a nice bump in earnings. So, investors should seriously consider accumulating Micron Technology stock once again. Its trailing price-to-earnings (P/E) ratio of 8.45 is well below the company's five-year average multiple of 12.6, which makes it an attractive bet right now before it becomes a top growth stock once again.
