While Micron Technology's (MU +15.40%) fiscal 2022 first-quarter results released on Dec. 20, 2021 indicate that the memory market is going to remain in good health, some market watchers believe that may not remain the case as 2022 progresses.
Micron crushed estimates as its revenue and earnings flew higher, while the memory market's bright prospects helped it deliver impressive guidance. Still, there are concerns that memory supply could increase at a faster pace in 2022, causing an estimated drop of 15% to 20% in the average selling price of DRAM (dynamic random-access memory) products next year.
However, an even newer event indicates that memory demand could grow at a faster pace than supply next year and support strong pricing. Let's see what it all means for Micron.
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This disruption could hurt memory output
Micron recently announced that the company's production of PC (personal computer) memory chips will be hamstrung by novel coronavirus-related closures in the Chinese city of Xi'an. The memory specialist has a test and assembly facility located in the Chinese city, where lockdown restrictions were tightened after Xi'an reported its highest daily count of symptomatic infections since March 2020.
In response to the outbreak, city authorities have enforced strict lockdown measures, which Micron says have resulted in "some impact to output levels of our DRAM assembly and test operations there." Though Micron points out that it is on track to meet most of its customer demand despite the disruption, the company adds that "there may be some near-term delays as we activate our network." So, Micron may not be able to make enough chips to fulfill new orders for memory chips.
Micron isn't the only one taking a hit on account of this latest coronavirus-related shutdown. Memory industry leader Samsung may also be impacted by this outbreak, as it has a factory in Xi'an that produces flash memory chips. Though the South Korean giant's facility in the city is still operating normally, its operations could be hampered if the latest outbreak isn't contained.
Samsung's two production lines in Xi'an reportedly account for 15.3% of global flash memory output capacity, according to TrendForce. As a result, it wouldn't be surprising to see global memory output take a hit thanks to the COVID-19 spike in the city.
Micron could get a boost because of this disruption
Micron management pointed out on the company's December 2021 earnings conference call that it sees a "healthy industry supply demand balance" in the memory industry in 2022 on account of "prudent industry capex and very lean supplier inventories." If a supply chain disruption lowers output, customers would find it difficult to get their hands on memory chips -- at least temporarily.
Such a situation would boost prices of memory chips, as more customers would be competing for a smaller supply pool of DRAM and flash memory, which go into several applications ranging from data centers to automotive to smartphones to PCs. It wouldn't be surprising to see memory demand growth outpace the increase in supply in 2022 and create a healthy price environment.
As it turns out, spot DRAM prices are already on the rebound. The spot price of DRAM had increased toward the end of November 2021 as per a third-party estimate, which was the first increase seen since the middle of June 2021. The spot price recovery is expected to continue as an outbreak of the Omicron novel coronavirus variant is expected to lead to an increase in online education and remote work. At the same time, cloud computing companies are expected to stock up on the supply of memory chips to avoid any constraints that may arise out of manufacturing shutdowns on account of potential lockdown restrictions.
Further evidence of an increase in DRAM spot prices arrived at the end of last month when Taiwanese publication DigiTimes reported that spot prices increased in December 2021. An increase in spot prices usually leads to an increase in contract prices, which bodes well for Micron as 90% of DRAM transactions are done on contract prices.
More importantly, Micron has taken steps to ensure that it doesn't miss out on a potential increase in prices by signing agreements with suppliers so that it has enough stock to meet the end-market demand. The company pointed out on its December 2021 earnings call:
On the supplier side, we have entered into strategic agreements to secure supply of certain components that we need to manufacture our products. As a result of these agreements, the current tight supply of these components is expected to gradually improve for us throughout calendar 2022.
These steps should help ensure that Micron doesn't miss revenue opportunities in the short term.
Keeping growth-stock status
Wall Street anticipates Micron's earnings to increase 47% in the current fiscal year, followed by a 29% jump in the next. Such impressive growth won't be possible without robust memory pricing.
Any disruption in output due to coronavirus-related headwinds should ideally turn out to be a catalyst for memory prices and help Micron Technology remain a solid growth stock in 2022. It is also worth noting that Micron is operating in an industry that's set for secular growth in the long run. A third-party market research firm estimates that the DRAM market could generate $206 billion in revenue by 2028 as compared to $105 billion last year. Similarly, the flash memory market is expected to hit $80 billion in revenue by 2025 from $62 billion in 2019.
As such, Micron could turn out to be a solid buy for the long run, with analysts expecting its earnings to grow at 23% a year for the next five years. This makes buying Micron stock a no-brainer right now given its earnings multiple of just 15, as it is available at a big discount to the S&P 500's multiple of 29.
