The tide is finally starting to turn in the memory chip markets. Production cuts across major suppliers of DRAM and NAND chips have helped whittle away the excess inventories held by customers. Micron (MU 2.92%) has been aggressive in reducing output, and it expects its wafer starts for both DRAM and NAND to be "significantly below" 2022 levels for the foreseeable future.
Average selling prices still declined for Micron in its fiscal fourth quarter, which ended on Aug. 31. DRAM prices were down a high single-digit percentage, while NAND prices were down a mid-teens percentage. But demand seems to have bottomed out. Micron boosted shipments of DRAM by a mid-teens percentage compared to the previous quarter, while NAND shipments soared 40%. Micron's revenue was down compared to the prior-year period, but it edged up 7% from the previous quarter.
While Micron is making progress, it's clear from the company's guidance that a return to solid profitability is still a ways off.
Negative gross margin
As memory chip prices plunged in recent quarters, Micron has been forced to write down the value of its inventory. In fiscal 2023, the company booked a total of $1.83 billion of inventory write-downs. This pushed Micron's gross margin deep into negative territory for the full year.
The good news is that the company didn't need to write down any inventory in the fourth quarter. The bad news is that gross margin was still negative. Micron brought in $4.01 billion of revenue, but the cost of goods sold was $4.45 billion. While the pace of price declines is slowing, Micron is still selling its products at a loss.
The picture is expected to get only slightly better in the first quarter of fiscal 2024. Micron sees revenue rising to $4.4 billion, but gross margin will be around negative 6%. The company expects calendar year 2024 to be a year of recovery, but it may take until 2025 before Micron's margins return to healthy levels. Micron expects its total addressable market to reach record levels in 2025 as demand returns, along with normalized levels of profitability.
The AI opportunity
One thing that will likely help pull Micron out of its downturn in 2024 is increased demand related to artificial intelligence (AI). While demand for traditional servers is weak, AI servers are flying off the shelves. AI servers capable of training advanced AI models require far more DRAM and NAND content than traditional servers.
AI accelerators like those from Nvidia use a special kind of memory called HBM, or high-bandwidth memory. Micron will begin ramping its latest HBM3E product in early calendar 2024, and it expects to generate meaningful revenues in fiscal 2024. It doesn't look like demand for AI accelerators is going to slow down, and competition from AMD and Intel should only help demand for HBM.
The PC market is still in a severe downturn, and even once it normalizes, it's unlikely that unit growth is going to be particularly strong. However, Intel's Meteor Lake processes have the potential to drive demand for PC DRAM. Meteor Lake includes built-in AI hardware capable of running inference workloads without needing to call out to a cloud service. These AI-enabled PCs will benefit from higher amounts of memory.
Is Micron stock a buy?
One metric I like to look at for Micron is the price-to-book value ratio. Micron is a capital-intensive manufacturer of commodity products, so this valuation metric is a useful way to ballpark whether the stock is cheap or expensive historically.
MU Price to Book Value data by YCharts
Micron's price-to-book value lies in the middle of its typical range over the past decade. The stock isn't expensive, but it's also not cheap. In fact, Micron stock is about twice as expensive according to this metric as it was during early 2016.
While AI-related demand may help pull Micron out of this downturn in 2024, it won't change the fundamental nature of the memory chip industry. Micron is not the next Nvidia. The company's results should improve next year, and profits should eventually return. But don't expect fireworks.
