- Apple makes great products. I love mine.
- Apple executives don't have the best track record on DRAM price predictions.
- DRAM contract pricing remains strong having firmed up 3% in the past month, even as spot pricing has been drooping.
- Analysts need to pay more attention to the profitability and not just the price. Sure the Average Selling Price will drop over time. But if cost reductions keep up, margins should do fine.
- Micron has finally almost caught up to the pack on DRAM technology. They lead the pack on NAND with the most dense offering of any competitor, and a good road map.
Back in February 2017 I ran an article with this memorable quote from Apple's (AAPL) CEO Tim Cook:
On this last rogue, let me tip my hat to the commentary of SA's William Tidwell and SA's Zynath Investment. Tidwell points out that Arcuri fails to consider loss of wafer starts due to node migration to finer geometries and the attendant inhalation of fab floor space. Zynath wonders where the 170,000 wafers per month are coming from and why UBS thinks a roof on a building means a fab is even close to production.
While I don't happen to agree with Arcuri, and think his report was a slap dash affair bewitched by satellite imagery, his record at Cowen bears watching like this from a 3/2/17 report while he was at his alma mater:
Let me go on record as saying that I don't think we are about to have a meltdown in DRAM Average Selling Prices based on a flood of new wafer starts in 2018. The price reduction will happen in time, but this is not that time. And when it does happen, analysts had best go to school on what the profitability effects are from this current round of node shrinks into the 1x, 1y, and 1z universe. A shrinking ASP is not the end of the world, especially if node shrinks are bringing in the kind of profitability Micron (NASDAQ:MU) has recently witnessed.
OK so that's what the rogues are saying. What are knowledgeable souls who are not talking their own book saying? Whew, glad we're done with the rogues. Here's DRAMeXchange which does pricing and only pricing for a living:
With regard to 3Q18, DRAMeXchange forecasts that the total smartphone production volume will increase by 5%-10% QoQ ahead of the traditional busy season. On the supply side, SK Hynix and Micron are expected to raise their wafer starts. This together with the overall advancement in technology migration and yield rate improvement may bring some ease to the strain in supply. DRAMeXchange thus anticipates that the overall trend of contract prices in 3Q18 will not deviate noticeably from 2Q18. Prices of discrete products are expected to be stable or go up a bit in 3Q18, while prices of eMCP products are expected to either stay constant or go down slightly. (May 2, 2018)
And here's Bernstein's Mark Newman in his April 30th report on Memory:
DRAM contract prices are up 3% MoM, in-line with expectations. After 6% increase in January followed by two consecutive months of flat growth, PC DRAM contract price increased 3% MoM in April largely due to supply constraint as the industry focused on catering to mobile and server demand. Spot price, however, declined 2% MoM but is still 8% above contract price.
And then of course there are Bernstein's excellent spot vs. contract charts which tells the story well:
Hmmm, looks like a melt up, not a meltdown.
Ok, I will acknowledge that NAND pricing is coming down. For the sell side analysts here's a pop quiz: What does that mean for profitability as Micron and the rest of the industry scale up from 64 to 96 layers and shed the remnants of their 2D portfolio?
And what does this all mean to Micron? Micron's stock price slump will probably end soon as expectation builds for their May 21 analyst day and then for some June date on which they will release earnings for the May quarter. Golly, with a couple of flat months and then a month with contract pricing up 3% in their typically toughest segment of PC DRAM, things should be rosy indeed. But then I'm out of the point specific prediction business.
At the May 21 analyst day I hope and expect we will hear about:
- Plans for the next fab
- A policy on cash: How much is required for capex, how much might be devoted to further debt reduction, and when we might expect a buyback and/or a dividend. Yes, I've drunk the Warren Buffett Kool-Aid on dividends but I think it should be done here in some small way at first.
Finally, I think the China entrance into the memory chip game is vastly overblown. It will happen, but it will take a lot of time for them to get to the performance level the three DRAM kingpins are showing.
I remain long Micron. Good luck to all.
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