7.31.24
I like that Western Digital gives numerical percentages instead of the small range silliness of Micron and the other memory IDMs. During the fourth quarter, NAND bit shipments were down 7% sequentially. This follows a 15% sequential decrease in the prior quarter (Q3), down 2% in Q2, and up 26% in Q1. Add this all together and NAND bit shipments from WD are down slightly (2-3%) in the last twelve months. Like-for-like ASPs were up 11% (blended was up 14%.) This follow like-for-like of up 18%, up 7%, and down 4% in the prior three quarters. This is a smaller price rise than has been seen at Micron, Hynix, and Samsung in NAND. This totals up to a 34-35% rise in NAND ASPs in the last year for WD. While this rise in prices is lower than what has been seen by Micron and others, their cost structure must be superior to Micron’s in NAND, because of the difference in gross margin between the two companies. WD’s gross margin was 36.3% for the quarter. Micron, while offset by a month in when their quarter ended, was below this gross margin for their total business, even though 70% of Micron’s revenue comes from DRAM, which has better pricing and margin than NAND. Management characterized the NAND industry as being in a “broad recovery” they are “beginning to see across our end markets.” AI demand is increasing the need for NAND. The growth in revenue was driven by the recovery in cloud and a shift of the company’s client mix to gaming and mobile, partially offset by a decline in consumer. Management also said in NAND, the “layers focus race is behind us. The emphasis is now shifting toward strategically timing the introduction of new longer-lasting nodes.” This is commentary I’ve not heard before from any NAND manufacturer. It strikes me as hopeful, to say node progression is going to slow dramatically. Guidance for revenue in the current quarter is for a 9% rise. That includes the HDD products, which will be split into a separate company by the end of 2024. For their fiscal Q1 (July-September), they are forecasting flattish NAND pricing, led by weakness in consumer, which is one-third of their NAND sales. Q1 is seasonally strong for mobile. In the September quarter they expect NAND ASPs to be up in the low single-digit range. Having ASPs flatten and then rise again is an unusual pattern for memory pricing. Is this elasticity responding to how much prices have risen? They also guided for less than a 200 bps sequential rise in gross margin for the current quarter, which suggests NAND is approaching peak of GM, yet there has been little investment coming out of the downturn. They see NAND demand outstripping supply in the second half of the year, and through next year also. Memory industry executives don’t know anything more than the rest of us about what the market will look like beyond one quarter out, so discount their views on late 2024 and 2025 accordingly. Their NAND fabs are now fully loaded. CapEx in Q1 will be in-line with what they spent in Q4, which was 2% of revenue. This is low. They haven’t changed their investment focus (on profitability vs. market share.) NAND cost will be down around 15% this year, which I think refers to calendar 2024. One analyst said NAND volumes disappointing across industry, yet pricing is good, which is unusual. Enterprise demand is strong. Consumer demand is weak. PC market seeing inventory rebalancing. Sounds like consumer and spot markets are weak. The bottom of the NAND market was almost a year ago, in the period between July and September of 2023, inclusive. This is almost on top of the nadir of the non-HBM DRAM market. NAND ASPs were in a much deeper hole than DRAM, so it will be longer before NAND capacity gets added. I am having trouble reconciling all of what was said by WD this quarter. Investment in NAND across the industry has been and continues to be well below historical levels and has not moved up from the downturn. Prices have risen in the last three quarters. Bit shipments have been flat. From these indicators, it looks like we are in the fourth inning or so of the NAND upturn with little new investment, yet pricing is forecasted to flatten. If bit supply is flat the only reason prices can be cresting is because demand growth has slowed. That could be from the elastic response of the NAND market or it could be part of a broader slowdown in economic activity.
-S. Hughes (cyclical long MU)