Slowing DRAM Supply At Samsung Is A Positive For Micron Technology, Inc.

  • There are reports that Samsung might trim its DRAM supply during the second half of the year.
  • This might help to alleviate the current DRAM oversupply in the market.
  • This might, in turn, provide short-term relief for Micron's DRAM sales outlook.

Micron Technology Inc. (NSDQ:MU) is one of the semiconductor chip companies that are trying to shift from the highly cyclical and commoditized DRAM market to the relatively more stable 3D NAND and newer technologies such as 3DXPoint. But Micron is still heavily reliant on DRAM, with close to 60% of its revenue tied to DRAM products. DRAM is a type of memory that is primarily used in PCs and cellphones. But the ongoing weakness in the PC market has been taking a heavy toll on the likes of Samsung Electronics (OTC:SSNLF), SK Hynix, and Micron, the three largest DRAM manufacturers with market shares of 46.4%, 27.1%, and 18.5% during the last quarter as per TrendForce.

The ongoing PC weakness and DRAM oversupply has particularly been wreaking havoc on Micron's fortunes. TrendForce estimated that industry-wide DRAM revenue fell 16.6% Q/Q during the seasonally weak first quarter.

A lot of that decline has something to do with a weak PC market. According to IDC, PC shipments fell 12.5% during the last quarter, considerably worse than the 11.3% consensus. Consequently, IDC cut its projections for 2016 shipments by 200 basis points to a 7.3% Y/Y decline.

Micron reported a massive 29.7% year-over-year revenue decline in Q1 2016 to $2.93B. DRAM bit shipments grew 2% Q/Q, but those gains were largely offset by a larger 13% decline in DRAM ASPs while cost per bit fell 6%. Non-volatile memory bits (mostly NAND) increased 5% but ASP fell 7% with cost/bit falling 6%. DRAM accounted for 58% of revenue with non-volatile memory products accounting for 34% of revenue.

Samsung Might Trim DRAM Supply

Samsung and SK Hynix substantially increased their DRAM output by improving their factory yields in 2014 leading to oversupply in the market. Most of the largest DRAM manufacturers in Asia  have been unwilling to cut their DRAM supplies, pretty much like the situation in the oil market. Most manufacturers have been willing to sacrifice their margins in a bid to gain market share.

But relief could finally be on the way, with Samsung's comments during its latest earnings call suggesting it could pare back DRAM supply. This sentiment seems to be supported by SK Hynix's recent projections that industry DRAM supply would fall during the second half of the year which would help the company's DRAM shipments to grow in the mid-teens Q/Q. Specifically, SK Hynix said it expects:

"more positive demand momentum around the second half as inventory levels for major customers is not too high today and demand from new smartphone launch toward the end of the quarter is expected to stimulate mobile DRAM demand with adoption of higher-density DRAM to continue, and launch of new server chipsets is expected to drive system buildup demand for servers."

SK Hynix added that the NAND outlook remains good with NAND supply/demand remaining more balanced than expected earlier.

3D NAND is Critical for Micron

If Samsung substantially cuts down its DRAM supply during the second half of the year as per expectations, then Micron stock could finally receive a much-needed break. Meanwhile, Micron might finally be able to arrest the growth in DRAM cost/bit when it fully transitions to 20nm processes. The company has been slow to transition to 20nm DRAM from 28nm, but recently said it's:

"very, very happy with the way 20-nanometer DRAM yields are trending.''

The long-term success of Micron, however, will depend on how rapidly it's able to ramp production of 3D NAND chips. Micron is confident that it can manufacture 3D NAND chips at price points cheaper than the competition, which could help the company quickly gain traction as the chips become more mainstream.

Investor Takeaway

Micron might be able to catch a break during the second half of the year if Samsung cuts back its DRAM supply to the market. Such a move would definitely spell healthy gains for Micron stock. The long-term performance of the stock will however largely depend on how successful the company will be in 3D NAND.

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