Memory chip manufacturer Micron (MU +0.59%) has been stumbling for multiple quarters through the worst downturn since the financial crisis. Memory chips are generally commodity products, with pricing dictated by supply and demand. With PC shipments falling off a cliff in the post-pandemic period, smartphone shipments slumping, and server shipments weakening, demand for dynamic random access memory (DRAM) and NAND chips has fallen far short of supply.
On top of this demand shortfall, the Cyberspace Administration of China has banned operators of key domestic infrastructure from buying Micron's chips in a retaliatory move. Micron said in June that roughly half of its revenue from China-based companies could be affected, which amounts to more than 10% of its total revenue.
NASDAQ: MU
Key Data Points
Micron's revenue was down 57% year over year in its fiscal third quarter, which ended on June 1. The good news was that revenue was up slightly compared to the previous quarter, an indication that demand may have bottomed out. The bad news was that pricing remained weak. Average selling prices for DRAM slumped 10% sequentially, while ASPs for NAND tumbled by a mid-teens percentage.
Micron has cut production and slashed capital spending along with the rest of the industry, although these moves have yet to arrest the price declines. Wafer starts for both DRAM and NAND chips have been reduced by nearly 30%, and Micron expects that reduced rate to be in effect well into calendar 2024. The company has also gutted its capital spending plans, with a 40% cut in fiscal 2023 compared to the previous year.
Micron's dramatic production and spending cuts are planting the seeds of the company's turnaround, although a surge in demand for PCs and smartphones appears unlikely. Per-bit memory prices tend to decline over time even in well-balanced markets. Occasionally, like during the pandemic, prices soar as demand outstrips supply.
There is one portion of the memory chip market that is seeing booming demand. While Micron is a long way from printing profits like it was during the pandemic, soaring demand for servers capable of powering artificial intelligence workloads could help pull the company out of its downturn.
More memory and more bandwidth
Demand for AI servers is exploding. Foxconn chairman Liu Yangwei predicts that the market for AI servers will grow from $30 billion this year to $150 billion by 2027, rivaling the size of the traditional server market.
While Micron is still seeing weak demand for traditional servers, AI servers have been a bright spot. The company says that an AI server requires between 6 times and 8 times the DRAM content and triple the NAND content of a traditional server.
An AI server typically includes powerful graphics cards capable of churning through AI training and inference workloads. NVIDIA is the overwhelming market leader, and it's latest H100 data-center graphics processing unit (GPU) doesn't skimp on the memory. This ultrapowerful GPU comes with a whopping 188GB of high bandwidth memory 3, or HBM3, a special type of DRAM that allows for exceptionally high bandwidth and low power usage. That's critical in AI workloads where massive datasets are being moved around.
TrendForce expects soaring demand for HBM3, as well as improving demand for the latest generation of DDR5 memory, to drive a recovery in the DRAM market. While the major memory-chip companies saw improvements in profitability in calendar Q2, according to TrendForce, Q3 should mark a shift back to operating profitability.
Micron is late to the HBM party. The company announced that it had begun sampling its own HBM3 chips in July, which feature a 50% improvement in bandwidth over currently available solutions. Mass production is expected to begin early in calendar 2024, and Micron expects meaningful revenue from this product in fiscal 2024.
NVIDIA will reportedly triple production of its AI-focused GPUs in 2024, with up to 2 million H100s expected to ship. Add in AI chips from other companies, including AMD and Intel, and it's clear that demand for HBM3 memory chips is set to explode.
Even if demand for memory chips that go into PCs, smartphones, and traditional servers remains weak, soaring demand for AI servers could be enough to drive a strong recovery for Micron next year. Although it's hard to know how long the AI gold rush will last, Micron is in a good position to benefit.
