This is a review of the financial results from Micron’s peer companies in DRAM and NAND manufacturing, released in March and April of 2022. In this review, I’m only looking for information on the markets for memory products; pricing, supply-demand balance, capacity investment, etc. This information is useful to Micron investors because the memory pricing cycle, with its three-to-four-year period, is the most important factor to consider when investing in Micron.
Micron Technology
March 29, 2022
Micron’s second quarter results were similar to those in the first quarter. Management had forecasted for a down quarter but memory pricing in both DRAM and NAND was better than expected. The CEO is sticking with his prediction that FY-22 will be a record revenue year for the company. The previous best year was FY-18 with total revenue of $30.39B. To match that they will need to average $7.46B per quarter for the third and fourth quarters. Since they guided for $8.7B in the third quarter things would really need to fall apart in Q4 for FY-22 to not be a record year. The opposite seems most likely. Pricing, the single most important factor for Micron the company and MU the stock, is favorable today and looks to stay that way for the rest of the year. The NAND supply loss at Kioxia recently has boosted NAND prices. Management said DRAM pricing is “constructive,” though not as good as NAND is. For the quarter, DRAM ASPs were down mid-single-digit percent after being up mid-single-digit percent last quarter. The story was reversed in NAND. Pricing there increased mid-single-digit percent this quarter following a mid-single-digit decline last quarter. The CEO said that supply chain constraints have improved some since last quarter and they expect that to continue as the year goes on, which should improve memory demand. They see the supply-demand environment continuing to be healthy for the rest of the year.
Nanya
April 11, 2022
Revenue in the quarter was down 6.8%, mostly because of a mid-single-digit % decline in ASPs. This is following a low-single-digit % decline in pricing in the previous quarter. Pricing rose for three quarters, Q2, Q3, Q4 of 2021, and has now dropped for two in a row. Nanya continues to forecast they will not grow their bit shipments this year. While Nanya’s market share is tiny, it is still helpful to overall supply and demand that they are not contributing to DRAM bit growth. The overall DRAM market is forecasted to grow high-teens % this year, so Nanya will lose share. The company said cloud/data center demand “remains healthy.” Mobile unit shipment strength is tapering and continues to have questions about the rest of 2022, because of lockdowns in China and rising inflation. The high end of the PC market (enterprise and gaming) remains strong while consumer systems are seeing weakness. They have a positive outlook for network, wearable, and smart homes. Automotive demand for memory is still suppressed by supply chain constraints.
SK Hynix
April 27, 2022
Hynix is Micron’s sister company. Both make ~70% of revenue from DRAM and ~30% from NAND. The two companies, along with Samsung, form an oligopoly that produces nearly 96% of the world’s DRAM. DRAM bit supply from the company declined high single digits % Q/Q. For the last three quarters in total, Hynix’s DRAM bits have shrunk 4%. They continue to say they will match industry DRAM bit supply growth for 2022, which they forecast to grow high teens % Y/Y. DRAM ASPs dropped low-to-mid single digits in this quarter, following a decline in the mid-single-digits last quarter. That is two quarters in a row of DRAM ASPs dropping. In NAND, prices increased low single digits %. The supply reductions from the Kioxia excursion have buoyed NAND pricing. Hynix is doing their best to fill this shortfall, having grown their NAND bits by mid-teens-percent sequentially. That is half a year of growth in one quarter. They continue to forecast the NAND market overall to grow bits around 30% in 2022. Server demand is strong and expected to stay so with the launch of DDR5 in the Fall. Demand for corporate and gaming PCs is “solid” while consumer PC demand is “weaker.” Mobile demand growth continues to be weak because of China. They see “gradual demand recovery” driven by high end models in the second half of the year. With Hynix’s low DRAM bit growth in Q1 they should be heavier than the overall market for the rest of the year. They guided mid-teens percent DRAM bit growth in Q2, planning to make up for the shortfall in Q1.
Samsung
April 28, 2022
Pricing for DRAM declines low single digits percent in the quarter, which translates to 1-2%. This is the second consecutive quarter of declining DRAM prices, though price declined more gradually. NAND has followed the same pattern; two consecutive quarters of small percent declines in ASPs after a strong increase (up 10%) in Q3. In both DRAM and NAND, Samsung is targeting to grow in line with the overall market. They have said in the past, and hinted similarly in this call, that they will prioritize profitability in DRAM. This translates to mean they will be cautious in adding DRAM capacity to not oversupply the market. The DRAM market seems to have been running right on the edge of supply balance for the past four quarters. ASPs softened gradually in the late Spring and Summer of 2021, then strengthened in the Fall and early Winter. Now prices are again gradually declining. Samsung said the softness is driven by weakness in consumer markets, specifically mobile and consumer PCs. Enterprise PCs and the data center segment are providing steady demand. They are continuing to face some diminishment in memory demand because of shortages in other components. Macro concerns (war in Ukraine, rising interest rates and the fear of a recession that brings, COVID lockdowns in China) are hanging over the memory markets now. It further hurts the outlook for memory that spot prices continue several weeks of declines.
Western Digital
April 28, 2022
The NAND pricing environment continues to be positive for memory makers. This was aided by the large excursion at Kioxia, the WD-Toshiba joint venture that makes NAND wafers for both companies. Even before that event, which took significant supply off the market, NAND pricing was surprisingly positive, given the amount of bit supply that has been added by Hynix and Samsung. WD’s management predicted that NAND gross margins would expand through the rest of 2022. This is not quite saying that ASPs will go up, but it is predicting a favorable enough environment that cost declines will outpace how much pricing drops. WD will see costs drop faster than normal as they recover from their output reduction from the excursion. Fabs have large fixed costs, so any reduction in output increases unit costs. The unit it in this case is NAND bits. Remembering that memory pricing is unpredictable over the short term, the WD executives must be confident that the NAND supply-demand balance will stay healthy for the rest of 2022 to predict gross margin expansion. Two takeaways for Micron shareholders here. First, the reduction in supply caused by the Kioxia excursion is mostly or completely in the past. Second, the NAND market will stay at a similar level of health for the remainder of 2022. Within demand, WD believes the PC market and data centers will be the drivers of NAND bit consumption for the rest of 2022.
Pricing Environment – Last Six Quarters
I built a summary for how DRAM and NAND pricing have changed in the last six quarters, from calendar Q4 of 2020 to calendar Q1 of 2022. I took the commentary from all the memory makers in each of these quarters and estimated the total change in ASPs over this 1.5-year period, which began roughly as the DRAM market started recovering from the COVID-19 shock. Over these six quarters, DRAM ASPs are up about 20% in total. The Big Three, Samsung, Hynix, and Micron have seen their pricing up high-teens %. Nanya is up more than 60% over this time. They are more exposed to the PC DRAM market, which has been stronger over this period. DRAM companies try to reduce their cost per bit about 10% per year, so any price declines that are less than this are expansionary to DRAM margins. DRAM prices for all companies have declined the last two quarters following rising ASPs for three quarters in a row. While DRAM spot pricing is still in mild decline, the last year-and-a-half have been a friendly pricing environment for DRAM makers.
NAND has been similarly mild for the last six quarters, though average ASPs are down approximately 6% in total over that time. The Kioxia event earlier in 2022 took significant supply off the market and caused prices to rise. Variation in NAND pricing has been more volatile in direction than DRAM. Excepting DRAM in the Spring of 2021, no market has seen more than a mild imbalance of supply in either direction.
Summary
The forecasts of the Big Three memory companies came to pass in the first quarter of 2022. All of them said price declines in the Q1-22 would be similar to Q4-21 and that is what happened. Unlike three months ago, all companies are less certain about the rest of 2022 than they were previously, since Russia invaded Ukraine in March and inflation is persistently high, raising concerns of a recession in the offing. Also, COVID-19 lockdowns in China are dampening both demand for electronics and supply chain shortages. The data center/server segment is the biggest user of memory and continues to show strong demand. Mobile demand is weak. PCs are mixed, with the high end (enterprise and gaming) showing strength and consumer models seeing softness. All three big DRAM makers have said they will prioritize profitability, to the point of holding inventory. They are cautiously optimistic that the second half of the year will see higher demand for both memory types as supply chain restrictions ease. All have said they will match DRAM market growth of high-teens percent for 2022. The excursion at Kioxia took some supply out of the NAND market but that has mostly cleared. Hynix says they will outgrow the NAND market, but they are also likely overestimating their supply growth as integrating Intel’s NAND business will be disruptive. I continue to hold the view that if we don’t side into a recession in the second half of 2022 that this period will be good for DRAM makers as the market goes into some degree of undersupply. I am still waiting for NAND to see price declines, given the “outgrown the market” comments made by both Samsung and Hynix in the last couple of quarters.
-Smooth Hughes (long MU)