NAND-based eMMC modules, designed for automotive installations. Source: Micron.
There ain't no such thing as a free lunch. In business terms, you won't find a risk-free way to make money. That's why the SEC makes every publicly traded company disclose its greatest fears in official filings. Smart investors pay close attention to these Risk Factors disclosures, found in 10-Q and 10-K filings.
Source: Micron.
In Micron Technology's (MU 9.60%) latest 10-Q report, you'll find a meaty Risk Factors section, detailing no less than 29 business hazards. They range from boilerplate issues like financial risks of letting customers buy products on pay-later contracts, to very specific worries about executing the Elpida merger.
But one warning stands out from the rest. As a Micron owner myself, this is the one thing that worries me the most. Micron gave this risk factor the respect it deserves, placing it at the very top of the list. And it goes like this:
"We have experienced dramatic declines in average selling prices for our semiconductor memory products which have adversely affected our business."
|
(Percentage Change in Average Selling Prices) |
DRAM |
Trade NAND Flash* |
|---|---|---|
|
2013 from 2012 |
-11% |
-18% |
|
2012 from 2011 |
-45% |
-55% |
|
2011 from 2010 |
-39% |
-12% |
|
2010 from 2009 |
28% |
26% |
|
2009 from 2008 |
-52% |
-52% |
*Trade NAND Flash excludes sales to Intel from [joint venture IM Flash Technologies].
It's a very straightforward warning, but a weighty one nonetheless.
At the core, Micron needs to sell memory chips at a profit. That means reducing manufacturing costs faster than the always-stressed selling prices are dropping. This industry is fraught with a history of price wars and intentional oversupply conditions. Sometimes, Micron actually does end up selling its chips for less than the cost of making them -- and that's a strong indicator for falling share prices:
At the moment, I'm not stressing out over plunging street prices on Micron's memory chips. Here are a few reasons why:
-
Micron spokesman Ivan Donaldson recently spoke at an industry conference, noting that the supply/demand balance looks healthy in the DRAM market. In fact, there's "probably little bit of undersupply today as you have seen with prices coming up here recently." In the NAND segment, prices have stabilized after a wave of oversupply at the start of 2014.
-
Mid-range smartphones are starting to ship with large memory installations in the 2 gigabyte range, which used to be the exclusive domain of high-end flagship models. This trend should keep the demand faucets flowing in the mobile DRAM market, stabilizing Micron's selling prices.
-
The company is converting some of its recently acquired DRAM manufacturing lines to produce NAND memory instead. This given Micron a tighter focus on the high-margin NAND segment, while rebalancing supply and demand on DRAM products.
-
None of these price-management moves would have been possible without the Elpida acquisition. Micron is now a major name in the memory markets, wielding significant power over global supply side trends. And the company has way more incentive to keep prices high than chief rivals Samsung or Toshiba, both of whom treat their memory chips as a hobby. For Micron, there's no business but the memory business.
-
And the price management techniques are working out for Micron so far -- not to mention how they're helping us investors:
So, I'm a happy Micron investor right now. The company is using its newfound price-control muscle, and it's paying off in high gross margins -- which leads to strong stock returns. Micron shares have jumped 33% year to date and more than doubled over the last year.
That being said, I will continue to keep a very close eye on this crucial risk factor. If selling prices start slipping again without a matching decrease in manufacturing costs, it'll be time to consider my options.
