Micron Stock: Memory Chip Prices Are Bouncing Back

Memory chip manufacturer Micron (MU 2.92%) is still in the depths of a severe downturn. In the fiscal fourth quarter, which ended on Aug. 31, the company booked a 49% year-over-year decline in revenue and a net loss of $1.43 billion. Gross margin was negative 10.8%, pushed down by inventory write-offs and tumbling prices for memory chips.

While Micron expects the situation to improve in its fiscal first quarter of 2024, the picture is still bleak. The company expects its gross margin to remain in negative territory, albeit improving to negative 4%. Revenue will return to year-over-year growth, but only because Micron is starting to lap the beginning of the downturn.

New estimates from TrendForce suggest that Micron's guidance may be a tad conservative. Average selling prices for both DRAM and NAND chips are expected to post healthy rises in the calendar fourth quarter, which partly overlaps Micron's fiscal first quarter. Prolific production cuts by manufacturers and rebounding demand for PCs should deliver an improved pricing environment in the coming months.

Bouncing back

Contract prices for DRAM chips were down somewhere between 0% and 5% in the calendar third quarter, according to TrendForce. In the fourth quarter, prices are expected to rise by between 3% and 8%. This rebound will be broad, with pricing expected to rise across the board.

Contract prices for NAND chips are set to rise even faster. TrendForce sees an 8% to 13% rise in pricing during the fourth quarter, with a larger 13% to 18% jump in pricing for 3D NAND wafers. Suppliers have drastically cut production, which has finally started to bring supply and demand back into balance.

Recovering demand for PCs is helping the cause. While global PC shipments slumped 9% year over year in the third quarter, the eighth consecutive quarter of declines, Gartner expects the industry to return to growth in the fourth quarter. Analysts at Citi are already seeing this play out, noting that notebook shipments grew 7% month-to-month in September, well ahead of expectations. Meanwhile, CPU market leader Intel has said that its third-quarter results are tracking above the mid-point of its guidance, and that PC inventory levels have come down to healthy levels.

Outside of PCs, production cuts are beginning to have the intended effect. The server DRAM market is a bit of a mixed bag, with tight supplies of DDR4 chips paired with rising production of newer DDR5 chips. While DDR5 prices are set to decline slightly in the fourth quarter, blended prices are still expected to rise between 3% and 8%.

Prices for enterprise SSDs are set to rise between 5% and 10% in the fourth quarter despite high levels of inventory among North American cloud computing providers. The inventory situation is better in China, where demand has been picking up. Micron expects inventory levels among its data center customers to normalize by early 2024.

A better year ahead

There are no shortages of memory chips, so sustained price increases may be unlikely. Per-bit prices generally decline over time on average, with manufacturers racing to lower their per-bit production costs by investing in more advanced manufacturing processes.

However, it doesn't look like prices are going to decline much in the near term. Micron is already seeing rising demand for both DRAM and NAND chips. The company grew bit shipments of DRAM by a mid-teens percentage sequentially in its fiscal fourth quarter, while bit shipments for NAND soared by more than 40%. As prices stabilize, Micron's bottom line should improve in the quarters ahead.

Micron will also start ramping up production of its new high bandwidth memory product in early calendar 2024. HBM memory is critical for AI accelerators, and the company expects to generate meaningful revenue from HBM in its current fiscal year. Even if overall pricing remains sluggish, HBM should provide a boost.

The expected price increases in the fourth quarter will only undo a small portion of the pricing declines Micron has experienced during this downturn. But it's the clearest sign yet that the worst is over.