Memory chip manufacturer Micron (MU 0.75%) reported slight declines in pricing for both DRAM and NAND memory chips in its most recent quarter. The company warned about sluggish sales of both smartphones and PCs for the rest of the year, providing revenue guidance that was well below analyst expectations.
According to fresh estimates from TrendForce, the pain in the memory chip markets won't be contained to consumer products. TrendForce now expects pricing for DRAM and NAND to potentially decline by double-digit percentages in the third quarter compared with the second quarter, with server DRAM and enterprise SSD prices plunging right along with everything else.
A cyclical market
For the most part, memory chips are commodity products. Prices rise and fall based on supply and demand, and brand names don't matter all that much. A consumer with a smartphone probably has no idea what company manufactured the DRAM or NAND chips in his or her device. The semiconductor industry in general is cyclical, but memory chips are more prone to sharp swings in prices than CPUs, GPUs, and other types of chips.
While per-bit prices of memory chips generally decline over time, so does the per-bit costs for manufacturers like Micron. If Micron can reduce costs at least as quickly as prices are falling, the company can keep the bottom line intact. In cases where per-bit prices actually rise, which has happened a few times over the past five years in the DRAM market, Micron's profits can explode.
Micron's average selling price for DRAM climbed 8% in fiscal 2021 following two years of 30%-plus declines. Micron's revenue rose nearly 30% as a result of higher pricing and strong pandemic-fueled demand, and net income more than doubled.
Periods of undersupply eventually give way to periods of oversupply, and that's what appears to be happening now. Sales of PCs are expected to tumble more than 8% this year, according to IDC, and smartphone shipments are expected to fall 3.5%. Demand for graphics cards, which use specialty graphics DRAM, has taken a hit following the bursting of the cryptocurrency bubble. And even demand for server DRAM has cooled, with TrendForce estimating that customers now have nearly two months' worth of inventory on hand.
Overall, TrendForce expects DRAM pricing to drop 10% in the third quarter, with the steepest declines seen in consumer-facing categories. In the NAND market, TrendForce expects an 8% to 13% decline, with wafer prices plunging as much as 20%.
No one knows how bad it will get
It's been a while since Micron suffered a really bad downturn. Micron's profits plunged leading up the pandemic, but the bottom line stayed in positive territory. In previous downturns, big losses were par for the course as prices plunged and demand dried up.
There's been consolidation in the industry, so perhaps downturns just won't be as brutal as they were in the past. But predicting demand is hard, especially with a potential recession looming. Sales of consumer electronics could plunge far more than current estimates. And if companies that buy servers start to see demand for their products and services eroding, they could pull back on IT spending. That would trickle down into the server memory chip market, forcing prices lower.
Shares of Micron have been dropping all year despite strong earnings. With a price-to-earnings ratio of just 7, the stock looks incredibly cheap. But for a company like Micron, results from a single year just aren't very meaningful. Profits have swung wildly in the past, and it looks as if profits are set to decline as memory chip prices drop.
Micron may be a solid long-term investment for patient investors, but the stock is not as cheap as it looks.