Three Upturn Scenarios for 2023 (or 2024 …)

These are three possible futures for memory pricing, and thus Micron’s stock price. In all these scenarios, Micron’s stock price will react around the same time that memory pricing turns. Investors have channel checks, DRAMExchange, and other ways to track how DRAM and NAND prices are moving. The effect of changing ASPs on company earnings will be delayed by at least a quarter, as much of what Micron sells is on contract pricing.

Scenario 1 (on schedule is ahead of schedule) – Things get better when Micron CFO Mark Murphy said they would during the Q4-22 analyst call. This is a best-case scenario, excluding a natural or man-made event that takes out a significant amount of memory capacity (factory fire, earthquake, PRC invasion of Taiwan). I use Murphy’s baseline scenario as my best-case because memory executives tend to be optimistic about when things will turn around. Leaders of the four DRAM companies didn’t see this downturn coming, so why think they would predict the upturn with much accuracy? Plus, Mark Murphy is new to the DRAM industry, so he doesn’t understand the cycles. In this version of the future, the DRAM market has balance crossover in Micron’s third fiscal quarter, which is between March and May of 2023. This would be five quarters after the bottom.

Scenario 2 (most likely, the baseline case) – Memory down cycles have historically lasted five to six quarters. The peak of the most recent upturn was somewhere around the end of calendar 2021 or early 2022. Recall it was an unusual cycle because of COVID, with gross margins within a 100-bps range for a full four quarters. Best I can see from analyzing the company and watching the stock price is the cyclical top was January 2022. If you believe my timing-the-cycle thesis, this puts the bottom somewhere between May and August of 2023, a downturn duration of six quarters.

Scenario 3 (two-factor downturn) – When the Great Financial Crisis hit in 2009, the DRAM industry was already a year into a bad downturn. The recession pulling away more demand, on top of an oversupplied market, made that downcycle epic. It killed off Elpida and made Micron the company it is today, with 25% DRAM market share. It also lasted more than four years. That is what happens when a generational recession gets laid on top of memory oversupply. If the global economy gets pushed over into a mild-to-medium recession in 2023, it will likely extend the DRAM downturn. If we layer that on the baseline case above (Scenario 2), and it’s not Great Recession II, the downturn will last another nine months, ending in March of 2024. I am assuming the recession would cause the downturn to extend for another two to four quarters longer than Scenario 2, depending on timing of when the recession starts. Taking the midpoint – three quarters – and adding to the middle of Scenario 2’s downturn (end of June 2023), I arrive at a bottom the end of March 2024. This scenario means Micron’s margins would be sub-35% for six quarters, which would be bloody for a company that was just getting used to milder cycles.

I have pointed out recently that memory industry executives don’t see accurately into the future. They missed the downturn in memory pricing that started in Spring of 2022. Then I go on to make my predictions. Me, a person who also didn’t see this downturn coming. I have thought a lot about why I missed this downturn coming and hope the lessons I’ve learned will improve my success at cyclically investing in Micron in the future. I do recognize the hubris implied with my predictions here, that I know better than memory executives. I wrote this set of scenarios because I need to have a view of what the future might look like to continue to invest in Micron on the memory cycle thesis.

S. Hughes (long MU)