Macro headwinds, the demand-supply mismatch, increasing competition and a consequent decline in memory product prices has put pressure on Micron Technology's (MU) top line growth. In addition to persistent weakness in the memory market, the temporary internal operation disruptions witnessed by the company last quarter led to a 12% annual decline in its revenue. Additionally, lower selling prices combined with the increasing investments in developing new technologies has put a downward pressure on Micron’s bottom line.
Nevertheless, Micron has managed to hold its ground well while many of its competitors have had to sell out or shut down operations due to mounting losses. It remains the only major U.S. memory chip-maker in a market increasingly dominated by Korean and Japanese manufacturers such as Samsung (SSNLF.PK) and Toshiba.
Micron is set to announce its Q2 2013 earnings on March 21, 2013. Though the demand-supply balance is improving, we do not expect any significant improvement this quarter as the demand has yet to reach a level to stabilize the memory market. However, we remain optimistic on Micron’s long-term growth potential. Its declining inventory levels for all the three divisions -- NAND, DRAM and NOR -- reinforce our belief of a revival in the memory market this year onward.
Here we list certain key trends that point towards an improving memory market.
Shift From PCs to Higher Growth Segments
A weak memory market combined with certain internal manufacturing issues, led to a 11% and 4% sequential decline in Micron’s DRAM and NAND sales last quarter, respectively. Micron claims that it has overcome all supply chain challenges and does not anticipate the problem to persist this quarter. Additionally, the ongoing consolidation in the memory market has taken some excess capacity off the market, which combined with improving macro economic conditions will help fuel demand for memory products.
A favorable trend that is driving demand for memory products is the shift from PCs to higher growth segments, such as mobile and servers. PCs have traditionally been the major buyers of DRAM and a slowdown in the PC market has considerably impacted the demand for DRAM products. The semiconductor industry is undergoing a shift with tablets and smartphones, replacing PCs as the growth engine of the industry.
For over three decades PCs have accounted for more than 50% of the DRAM market. However, Micron claims that currently only 35% of the bits produced in DRAM are consumed by PCs. On the contrary, mobile DRAM's market share in total DRAM shipments has increased significantly over the years. Research firm iSuppli forecasts the combined share of mobile handsets and tablets in the DRAM market to reach 26.7% by the end of 2013, almost double from 14.1% in Q1 2012.
Micron intends to shift its focus on specialty markets such as server, networking, graphics and consumer devices. It currently generates less than 10% of its revenue from mobile DRAM, but with Elpida on board with Micron, the proportion could significantly increase as Elpida has a strong presence in the mobile DRAM market (read: "Micron Is A Step Closer To Becoming The Second Largest DRAM Manufacturer").
Mobile Trend to Drive Content Growth in DRAM and NAND
We believe that the growing demand for mobile devices will further lead to an increase in flash memory content for such devices, fueling growth in NAND and mobile DRAM sales. In addition to smartphones and tablet, the rising demand for SSDs is also expected to steer demand for NAND products.
Micron claims to be seeing 100% growth rate in content about every 14 to 16 months. According to the company, the average DRAM content increased from 725 megabytes a unit last year to around 1.3 gigabytes per unit at present. Micron believes that the average content in handsets and tablets can increase by 4 gigabytes of DRAM per system.
According to iSuppli, the tablet consumption of NAND flash is estimated at 2.3 billion gigabytes (Gb) in 2011, an increase of four times from 476.8 million Gb in 2010, and NAND shipments for tablets are forecast to reach 12.3 billion Gb by 2014.
Stability in Memory Product Prices
The 5% increase in the average selling price of NAND Flash in Q1 2013, on account of higher sales in premium segments, offset the 9% volume decline in NAND. On the other hand, the DRAM average selling prices remained low with a sequential decline of 11%. While Micron claims that the overall memory product prices stabilized at the end of the quarter and the trend has continued so far this quarter, it might be too soon to forecast an upward trend in prices.
Though the PC market remains weak, we think an increase in demand for mobile DRAM products and a reduction in excess capacity in the market would stabilize DRAM selling prices in the future. Additionally, Micron's CEO expects the rapid decline in NAND prices to ease in 2013, as the industry witnesses increasing market consolidation and significant production cuts. With the robust growth rate in mobile devices as well as the strong NAND content growth across all devices, the future prospects of the global NAND flash market looks promising.
We will update our price estimate of $6.53 for Micron Technology after the Q2 2013 earnings release.
Disclosure: No positions.