Following a pandemic-era boom, the memory chip industry is going through an extreme bust. Micron (MU -4.61%) CEO Sanjay Mehrotra recently called the current environment the "worst downturn in the last 13 years with an exceptionally weak pricing environment that is significantly impacting our financial performance."
Supply chain inventories are bloated, and despite production cuts from Micron and its peers, supply is still outstripping demand. Micron grew bit shipments of both DRAM and NAND sequentially in its most recent quarter, but per-bit pricing was down at least 20% for both types of memory chips. The result was a 10% sequential revenue decline, and a 53% year-over-year revenue decline.
Prices won't stop dropping
When per-bit prices drop faster than Micron can bring down per-bit production costs, the bottom line takes a big hit. Micron posted a net loss of $2.1 billion in its most recent quarter, and gross margin was negative thanks to inventory write downs.
According to research from TrendForce, the situation isn't really getting any better. TrendForce ramped up its estimates for pricing declines for the calendar second quarter earlier this month, a sign that production cuts just haven't been enough to bring supply and demand back in sync.
TrendForce now expects DRAM pricing to plunge by 13% to 18% in the second quarter sequentially, worse than its original outlook calling for a 10% to 15% decline. Within DRAM, pricing for both PC and server DRAM is expected to fall between 15% and 20%, while mobile DRAM will suffer a smaller 13% to 18% decline.
In the PC industry, pricing for older DDR4 memory is dropping hard due to an abundance of inventory, while newer DDR5 memory is experiencing a more modest decline. Global shipments of PCs plunged 29% year over year in the first quarter, according to IDC, as weak demand from consumers combined with excess inventories to produce a historically weak market for PCs.
A similar situation is playing out in the server DRAM market. DDR4 pricing is crashing due to excessive inventories, while DDR5 pricing is holding up better. DDR4 is still used much more widely, which is driving overall pricing down. Global spending on servers is expected to dip slightly in 2023.
The mobile DRAM market is doing a bit better. Smartphone manufacturers have largely completed the process of bringing down their own inventories, so they're now purchasing memory chips at a rate close to actual consumption. But TrendForce noted that memory chip suppliers still have too much inventory, which is prompting substantial discounts. Global smartphone shipments are expected to edge lower this year.
The situation for NAND chips, which go into solid-state drives and flash memory, isn't quite as bad. TrendForce expects an 8% to 13% decline in pricing in the second quarter, down from an initial forecast calling for a 5% to 10% decline. In the enterprise SSD market, weak server demand is making it difficult for inventory levels to be brought down. TrendForce does expect demand to improve in the second half of 2023, which should help the situation.
Is Micron stock a buy?
Shares of Micron have dropped about 33% from their multi-year high. Revenue has crashed in this tough environment, and big profits have given way to massive losses. Micron's most recent net loss was by far the largest the company has ever experienced.
MU Net Income (Quarterly) data by YCharts
During the good times, Micron can make a lot of money. But during the bad times, things can really go off the rails. The situation in the memory chip markets should start to improve in the second half of the year, but that doesn't mean that prices will rebound, or that Micron's sky-high profits will return. In a balanced market environment, Micron's profitability won't be nearly as impressive as it was during the boom times of the past few years.
Demand for memory chips should rise in the long run, partly due to increased usage in automotive applications and for AI workloads. But pricing will swing up and down with supply and demand, just like it always has. It's hard to say whether Micron stock is cheap or expensive right now, given the intense uncertainty, but investors should be prepared for further declines if the current downturn drags on past this year.
