1.25.24
I review the financial reports from the other significant memory manufacturers to learn more about the state of the DRAM and NAND markets, not to analyze the companies as investments. Hynix is Micron’s sister company. It is similar in size and is split 70-30 between DRAM and NAND. The Korean company has typically been more profitable that Micron at a given point in the cycle, but the gap has closed in recent years.
Investor Presentation
In Q4 of 2023, Hynix DRAM bit shipments was up low single digits percent (previous seven quarters were up around 20%, up mid-30%, down around 20%, flat, down mid-single digits %, up 10% and down high-single digit %.) This totals up to growth of approximately 25% in total over the last seven quarters. That is a growth rate of 14% per year, not far off what the DRAM makers believe the long-term rate of bit demand growth will be. In NAND in Q4, bit shipments were down low single digits percentage (previous seven quarters were up mid-single digits percent, up around 50%, down mid-teens %, down high single digits %, down low teens %, up high single digits % and up high teens %.) In DRAM ASPs were up high teens % sequentially (up around 10%, up high single digits and down high teens % in the prior three quarters) and NAND ASPs were up 40%+ Q/Q (slightly down and down around 10% in the prior two quarters.) This is an encouraging quarter for DRAM pricing, though there is a caveat. Hynix is the leader in HBM products. These are in high demand because of the growth in AI, so that strength is reflected in this blended ASP. Said another way, pricing across the DRAM market is not as strong as high teens %, but over time different segments tend to converge, as producers adjust wafer start mix. I have no other explanation for the striking rise in NAND pricing (40%!) other than demand strength and low supply.
Overall company revenue was up 25% sequentially (up 24% in Q3, up 44% in Q2, down 34% in Q1, down 30% in Q4-22, down 20% in Q3, rose 14% in Q2). Gross margin was positive 1% (+1% in Q3, -16% in Q2 and -32% Q1) and operating margin was barely positive (<1%) (was negative 20% in Q3, negative 39.0% in Q2 and -67% in Q1). Revenue has risen for three quarters and gross margin has expanded for three quarters. For Hynix, the market seemed to have bottomed in the first quarter of 2023. For Micron, the nadir was four to six months later. I think the reason for this is the strength of Hynix in HBM and the emergence of AI in 2023. Micron is a laggard in HBM and is thus a better gauge of the overall DRAM market.
For 2024, the company is forecasting DRAM demand bit growth to be up mid-to-high teens % year-over-year. This is down from their forecast of high teens % growth for 2024, perhaps because 2023 finished stronger than expected, raising the endpoint for the year. They see NAND bit demand in 2024 growing by mid-to-high teens % year-over-year. This is below the industry consensus for the long-run average.
The company sees PC unit shipments growing mid-single digits % in 2024. Mobile units will also grow mid-single digits %. In both segments, the company cited memory content increasing because of AI. I discount these comments as there is always some driver of higher content growth. That growth matters, but it is part of the baseline in memory. The server market is the laggard, with Hynix expending recovery in the coming year because of, you guessed it, AI demand. For the first quarter of 2024, the company is guiding mid-teens % decrease in DRAM bit growth but with “continuous improvement in price environment.” In NAND, bit sales growth is expected to rise mid-single digits % quarter over quarter, also accompanied by stronger pricing. For the year, capital expenditures will rise “at a minimum level” as the company focuses on profitability and investment efficiency.
Analyst Call
Here are highlights from the earnings conference call:
Prepared Remarks:
· Increased demand for all types of memory were the primary driver of better pricing. The company sacrificed higher bit shipments in favor of better pricing. This is the reason bit shipments were weaker than forecasted and ASP increases were stronger. Product mix was also cited as a reason for a higher average ASP in the quarter.
· The market has moved “toward” recovery, from a “severe downturn.”
· The company plans to be flexible in expanding capacity to meet the market in 2024, with continued focus on profitability. Both DRAM and NAND pricing are expected to continue to increase in the first quarter and through the rest of the year.
· They made similar comments to Micron’s on fab utilization. That is, the shift to DDR5 and HBM will continue to constrain supply and legacy node supplies will decline in the future.
· Recovery in NAND prices has been more gradual than DRAM.
Analyst Q&A:
· In 2024, supply and demand are expected to be imbalanced, leading to increased pricing. Demand growth for both DRAM and NAND is forecasted to be in the mid-to-high teens % while supply growth will be in the low single digits %. Inventory levels will continue to improve throughout the year.
· They expect to reach normal inventory levels in DRAM in the first half of 2024 and in NAND in the second half of the year. Inventory is coming down significantly as demand is higher than supply.
· While the company expects rising prices, they plan to be conservative with capital investments. They will minimize incremental investment in 2024, focusing instead on advanced nodes and essential infrastructure. They signaled the bar for capacity investments will be higher than it has been in the past. They want to avoid the cycles of the past. All the memory companies dream of this, but cyclicality is built into this market.
· Production cuts continue in legacy products that have excess inventory. This will continue until pricing is high enough, and inventory is low enough, for these sales to be profitable.
· HBM’s larger die size means it consumes twice as much wafer area as mainstream DRAM. I assume this refers to DDR4. As wafer starts are shifted to HBM products, wafer capacity is reduced, all else equal.
· NAND prices are expected to rise throughout 2024. Because of this, rising demand coming from price elasticity is expected to slow.
· NAND profitability in the quarter was from increased pricing, followed by better mix of high-value products. There was also a reversal of a prior inventory write-down, because of the better pricing. This reversal is expected to have a positive impact on results this year.
Summary
The company said the right things regarding capital expenditures and expanding capacity. That is, they are focused on profitability and investment efficiency. Micron made similar comments. Now we just need Samsung to say the same in a few days. The market bottomed in Q1 for Hynix, a few months ahead of MU. I hadn’t realized this until these results. I think the reason is Hynix’s strength in HBM, where Micron is weak. Thus, Micron is a good indicator of the overall DRAM market where Hynix’s results improved earlier because of their outsized exposure to AI demand. In 2024, the NAND market recovery will be slower than DRAM. Here is the most important information from the entire call. The company expects demand growth in 2024 for both DRAM and NAND to be in the mid-to-high teens percentage while supply growth will be in the low single digits percentage. If this degree of difference between demand and supply materializes, memory prices will rise strongly in 2024. This call had almost no cautious statements about macroeconomic factors, etc. It was all positive, indicating that both DRAM and NAND will recover in 2024 with prices steadily rising throughout.
-S. Hughes (cyclical long MU)