Memory-chip manufacturer Micron (NASDAQ:MU) posted record profits in fiscal 2014 and 2015, but the falling prices of both DRAM and NAND chips have caused the company's revenue and profits to slump. Micron now expects to post a loss during its fiscal second quarter, and predicting when the situation will improve, or how much worse it will get, is next to impossible. Here's a look at three of the key numbers that will be important for Micron in the coming years.
The standard DRAM chips that go into PCs, smartphones, and servers are commodity products. What this means is that the price Micron gets for its DRAM chips depends almost entirely on supply and demand. When demand outpaces supply, prices go up and Micron turns a tidy profit. When supply outpaces demand, prices drop and Micron sees its margins contract.
Micron, along with other DRAM manufacturers, are always working to cut costs at least as fast as prices are declining. Sometimes the company succeeds, and profit margins remain intact despite falling DRAM selling prices. But during periods of serious oversupply, prices fall so quickly that there's nothing that Micron can do. During 2012, Micron's average selling price per bit of DRAM declined by a whopping 45%, on top of a 39% decline during 2011. This situation led Micron to post a massive $1 billion loss during fiscal 2012.
DRAM prices recovered over the next few years, leading to record profits for Micron in fiscal 2014 and 2015. But the company once again finds itself selling into a market oversupplied with DRAM. Micron's per-bit DRAM selling price dropped by 11% during 2015, and the company expects to post a loss during its fiscal second quarter. Things will eventually improve as demand catches up with supply, but investors shouldn't forget how bad things can get for the company.
The main reason DRAM prices have been weak as of late is slumping PC sales. During the fourth quarter of 2015, IDC estimates that global PC shipments slumped by 10.3% year-over-year, continuing a trend that has plagued companies that are dependent on the PC. During Micron's fiscal first quarter, the segment containing PC and server chips posted an operating margin of just 1.8%, saved from a loss by strong demand for server chips.
While the PC market is expected to show signs of stabilization this year, the smartphone market could pose another problem. Smartphone unit growth slowed down in 2015, with IDC estimating that global shipments grew by just 9.8%, and the firm expects a compound annual growth rate of 7.4% through 2019. For Micron, strong demand for smartphone memory chips has partially counteracted weak demand for PCs, but that may be coming to end.
Already, Micron is seeing its mobile segment margins contract. During the fiscal first quarter, mobile revenue slumped by 13% compared with the previous quarter, and the segment operating margin fell by 11 percentage points to 16.3%. The amount of DRAM memory per device can still grow going forward, but with Gartner predicting that DRAM oversupply will expand into the mobile segment this year, Micron's mobile profitability could have much further to fall.
While Micron's commodity memory business fluctuates based on supply and demand, 3D XPoint, a new type of memory developed jointly with Intel, has the potential to be a major new source of revenue for Micron. 3D XPoint memory is non-volatile like the NAND memory used in solid state drives, but it offers about 1,000 times better performance. DRAM is still faster and more durable, but 3D XPoint could find applications in the data center, providing a layer of memory between DRAM and NAND.
Micron doesn't expect meaningful revenue from 3D XPoint until 2017 at the earliest, but 2018 is when the company expects things to get interesting. During Micron's summer analyst conference, CEO Mark Durcan suggested that 3D XPoint could grow into a business half the size of Micron's DRAM business in 2018. Based on fiscal 2015 numbers, this means that 3D XPoint revenue could reach about $5 billion within three years.
These estimates may be optimistic, and significant adoption of 3D XPoint is not a foregone conclusion. The pricing of DRAM and NAND will be a factor in determining whether 3D XPoint catches on; if the price of DRAM falls dramatically, it may make sense for clients to simply buy more DRAM, relegating 3D XPoint to niche status. But if Micron's new memory technology finds success, it could boost the company's annual revenue by billions of dollars.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Gartner and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.