The memory chip market is in an extreme state of oversupply. There's too much supply of DRAM and NAND chips floating around, and inventory levels of the products that use those chips are also elevated. The PC market, for example, is in disarray. Global PC shipments plunged 29% year over year in the first quarter, dropping below pre-pandemic levels.
This supply-demand mismatch has driven per-bit memory chip prices down far faster than manufacturers can reduce costs. For Micron (MU -0.60%) DRAM average selling price tumbled 20% in its latest quarter on a sequential basis, while NAND average selling price dropped approximately 25%.
Micron's revenue was more than cut in half compared to the same period last year, and the company reported a staggering loss. On $3.7 billion of revenue, Micron managed a net loss of $2.3 billion. Inventory write downs totaled $1.43 billion, and free cash flow for the prior six months turned deeply negative.
A light at the end of the tunnel
Despite Micron's abysmal results, there were some reasons to celebrate for investors. Memory chip manufacturers including Micron have been slashing production in an attempt to rebalance the market, and those efforts are starting to bear fruit. Micron CEO Sanjay Mehrotra said during the latest earnings call that he expects the supply-demand balance to improve going forward, that Micron's days inventory outstanding, excluding the impact of inventory write-offs, has likely peaked, and that sequential revenue growth should be just around the corner.
Micron believes that its revenue from the data center industry has bottomed, and it expects its customers' inventories to return to healthy levels by the end of calendar 2023. The PC market will be trickier. Micron sees global PC shipments dropping by a mid-single-digit percentage this year, which will slow down the process of bringing supply chain inventory levels down. There has been some progress on that front, and Micron expects bit demand to rise in the second half of the year. A similar story is expected to play out in the mobile market.
While Micron has been slashing production, market leader Samsung has until recently refused to do the same. In a concentrated, commodity market like memory chips, the beginning of the end of a downturn usually requires all players to cut output. After Samsung's profit crashed in its latest quarter, the South Korean company announced a "meaningful" cut in memory chip production. That's a big change in strategy, and it should hasten the return to healthy inventory levels across the supply chain.
Don't expect big profits
Micron reported incredible profits during much of the pandemic. Demand for PCs and other devices was elevated, leading to an extreme state of undersupply and soaring per-bit prices in the memory chip market.
Big swings in profitability are normal for Micron. The company routinely goes through booms and busts, churning out solid profits during the good times and sometimes posting losses during the bad times. It's important to remember that Micron's profitability is always transient. That's the nature of cyclical, commodity markets.
While the memory chip industry is now on the path to bringing inventory levels under control, investors should not expect a quick return to pandemic-level profits. It looks unlikely that a shortage of chips, a necessary requirement for Micron to produce excessive profits, is coming anytime soon. With a potential global recession looming, demand for PCs and other products could remain muted for quite some time.
It does look like the worst is over for Micron, but this downturn is going to take a while to fully play out. And once the industry emerges from its funk, excessive profits likely won't be on the menu.
