In 2012, macro weakness, the demand-supply imbalance, intense competition and declining selling prices lowered Micron Technology’s (NASDAQ:MU) top line growth and impacted its profitability. However, increasing consolidation in the industry, rising demand from non-PC markets and improving memory product prices returned the company to profitability in fiscal 2013. Micron has performed strongly in the first half of fiscal 2014 and is confident of retaining its growth momentum for the rest of the year. The company will announce its fiscal Q3 2014 earnings on June 23. (Fiscal years end with August.)
Micron maintains a favorable outlook for the memory industry conditions for the rest of the year. With a large and diverse memory product portfolio across a number of end-market segments, and the second largest installed manufacturing capacity, it is in a strong position to benefit from the improving industry dynamics.
Improving DRAM Market Dynamics
PCs have traditionally been the major buyers of DRAM, and a slowdown in the PC market considerably impacted DRAM demand in the last few years. The rising proportion of demand from the mobile and server segments is driving growth in the DRAM space. Though the PC DRAM demand has increased in the last two quarters, its proportion is expected to decline in the future. Currently, PC, mobile devices and servers account for 40%, 30% and 15% of the DRAM demand, respectively. The mobile and server segments are the fastest growing in terms of DRAM demand, with annual growth projected in the range of 50%–60% and over 40%, respectively.
Micron believes that the DRAM industry is in a bit of an under-supply at present. It claims that demand is growing, but at a rate that the industry can supply just by investing in technology. The company believes that the existing capacity base, in terms of the net wafers produced, is sufficient to cater to DRAM demand in the foreseeable future. Although the mix that the company is producing may vary (between PC, mobile and servers), Micron’s manufacturing capacity is flexible and can be moved around those variables.
Micron as well as other market players are focusing on leveraging their present technologies to deliver value-added devices to their customers. Capital spending in the DRAM market in the last few years has been more focused on process technology migration, rather than on building new capacity. Micron estimates the DRAM industry wafer production will be down by 5% in 2014, with total DRAM industry bit supply up in the mid-20% range.
NAND Is The Most Rapidly Growing Memory Product
During its analyst day conference last year, Micron declared that NAND products are the most rapidly growing and the most elastic segment of the memory market. Rising global mobile device shipments and increasing demand for Solid State Drives (SSDs) are the most important trends driving current demand for NAND Flash products. The NAND market was in over-supply in the first half of the year, but Micron claims that the market is coming into balance. It believes that the outlook for NAND demand and supply in the second half of the year looks favorable.
In the NAND space, a significant portion of the capital spending by Micron is being utilized for transitioning the additional fab capacity from DRAM to NAND. In addition, the company is investing more in building greenfield cleanroom floor space and an early pilot line for 3-D NAND. The company now has essentially all of its Singapore operations producing NAND, which it believes gives it real benefits in terms of operational efficiency and cost going forward.
Micron projects NAND industry supply growth in the low 40% range for 2014, which includes a 10% growth in industry wafer production and the remaining supply growth coming from technology transitions. It estimates a similar growth range for 2015, but forecasts growth to slow down beyond 2015 as 3-D production becomes more predominant and there is a subsequent reduction in wafer output, given the additional back-end capacity required for 3-D NAND.
Stabilizing DRAM & NAND Prices
Strong demand for DRAM and NAND products, coupled with their restricted supply, has eased downward pressure on prices. In 2013, the average selling price for DRAM increased by 9.6%, and the rate of decline in NAND flash prices decreased to 5.6%.
As capacity shifted away from commodity DRAM production, buyers started building up their inventory to avoid any potential supply shortage in the future, especially since the decline in PC sales appears to be troughing. This resulted in an upsurge in DRAM product prices. Samsung (OTC:SSNGY), which is the largest DRAM manufacturer, had increased its mobile DRAM production (by 30,000 wafers per month) due to better than anticipated demand for the Galaxy S4 and other Smartphones and Tablets. Additionally, the earthquake that struck Taiwan and the fire at SK Hynix’s Chinese (in September ’13) created a shortage in DRAM supply, which drove up DRAM prices.
We believe that the upward trend in DRAM prices might not last in the long run as the underlying cause for the current upsurge in prices is more due to the strategic move of OEMs rather than any fundamental change in market demand.
The rising demand for NAND flash products, combined with the fact that suppliers have not increased their NAND manufacturing capacity, have stabilized NAND prices. Demand for NAND is increasing due to rising mobile and SSD shipments and higher memory content in these devices.
DRAM products prices were flat in Q1 2014 and declined by 1% in Q2 2014, whereas NAND Flash prices declined by 6% and 18% in the last two quarters. For fiscal Q3 2014, Micron expects prices for both these memory products to decline by low single digits.
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