Micron Reportedly Boosts NAND Prices, but There's a Catch

Memory chip maker Micron (MU 2.92%) has been fighting through a brutal downturn since its pandemic-era boom came to an abrupt end. Demand for PCs fell off a cliff; the smartphone market contracted; sales of gaming graphics cards slumped after the cryptocurrency bubble burst; and demand for servers weakened.

Memory chips are largely commodities, so pricing ebbs and flows along with supply and demand. During times when supply heavily outstrips demand, a manufacturer like Micron will generally lose money on every bit of memory it ships. During the fiscal third quarter, which ended on June 1, Micron reported a 57% year-over-year revenue decline to $3.8 billion and a gross margin of negative 17.8%.

One problem with tumbling memory chip prices and production that exceeds demand is that Micron must continually write down the value of its inventory to reflect prevailing market conditions. In the nine months that ended on June 1, Micron booked a total of $1.8 billion of inventory write-downs.

Micron and its competitors have cut production and slashed capital spending plans, but it's taken time for the impact of those moves to be felt. In Micron's Q3, per-bit prices for DRAM chips fell by about 10% sequentially, while NAND chips suffered a steeper, mid-teens percentage decline.

While it's too early to say that the downturn is definitely over, the pricing situation is finally starting to improve for Micron. In a recent tweet, TF International Securities analyst Ming-Chi Kuo said that Micron had successfully boosted its NAND wafer contract prices by about 10% in September. This tracks with a recent report from TrendForce, although it may not be a sign that prices are set to rebound.

Higher pricing with caveats

In a balanced memory chip market, per-bit prices decline over time as manufacturers invest in increasing density. In a downturn, pricing falls much faster than usual as end markets simply can't absorb the quantity of chips being produced. While Micron was able to boost NAND contract prices this month, sustained price hikes require demand to outstrip supply, which is certainly not the case right now.

TrendForce reported that negotiations in late August between NAND suppliers and Chinese module makers resulted in contract prices for 512 Gb wafers that were about 10% higher than previous contracts. This could be a sign that suppliers are growing a bit more confident about future demand and are thus less eager to close deals at lower prices. Active price inquiries rose for some products in the wake of these price increases.

TrendForce notes, though, that it's not clear whether this pricing increase or uptick in demand is sustainable: "[W]hether this surge in procurement is supported by actual end-user demand remains uncertain, as these orders have arisen in reaction to adjustments in supply side pricing."

Suppliers are still actively cutting production, with TrendForce expecting further NAND production cuts from Samsung through the end of the year. This likely means that the market is still oversupplied, and that further price increases aren't in the cards for now.

A brighter picture in the DRAM market

While the NAND market may not get much worse, there's little capable of driving demand above supply in the short term. The story is different in the DRAM market. As Kuo noted in his tweet, demand for DRAM should benefit from Intel's Meteor Lake launch, soaring demand for artificial intelligence servers, and a push to run advanced AI models on devices.

AI accelerators like NVIDIA's GPUs use high-bandwidth memory, which delivers quicker data throughput for AI workloads. Micron expects to generate meaningful revenue from its upcoming HBM3 chips in fiscal 2024, which will help offset any continued weakness in the PC, smartphone, and general server markets.

The memory chip downturn isn't over, but there are signs that a bottoming out is underway. The DRAM market may recover first thanks to AI demand, while the NAND market is at least starting to look a little healthier. Don't expect pandemic-level profits from Micron anytime soon, but 2024 should look a lot better than 2023.