Micron: Has the storage chip behemoth survived the winter yet?
$ Micron Technology US, as the leading company in the chip segment of American technology stocks, saw its stock price rise tenfold over the course of five years. However, last year the stock price experienced a flash crash, plunging nearly 50% year-on-year. Today, Micron has fallen back to around 1 times PB. Is it still worth paying attention to?
Source: Longport.app
This article primarily looks at Micron from three perspectives: 1) What does Micron, the top player in the chip segment, specifically do? 2) What is the specific situation of the storage chip segment? 3) Why did Micron's stock price fall so much?
With storage chip prices frequently falling, Micron couldn't escape the "cyclic" curse. After experiencing nearly a 50% decline, Micron once again came to the edge of "P/B = 1". When storage chip prices returned to the cost line, new storage demands such as ChatGPT re-emerged. In the case of significant reduction in industry capital spending, the Dolphin believes that Micron may be worth paying attention to.
The current Micron has dual perspectives of "cyclicality" and "growth":
1) Cyclicality: Micron focuses on the storage field, with almost all of its revenue coming from DRAM and NAND. Due to the high degree of business concentration, the company is heavily influenced by the industry's cyclical effects. After the prices of storage products frequently fell, the profit margins of storage companies were compressed to around the breakeven point;
2) Growth: There is constant demand for storage technology upgrades and iterations. In the field of DRAM, mainstream DDR4 has begun to transition to DDR5, while the main manufacturers of NAND have also reached a level of around 160-170 layers. Updated technologies have brought lower energy consumption and higher efficiency products. In addition, the promotion of large models such as ChatGPT has increased the demand for AI chips and servers, driving the growth of storage chip demand.
"Cyclical" refers to the industry's opportunity to repair itself when the cycle bottoms out; "growth" refers to the expectation of technology upgrades and new demand releases. With Micron being in the first tier of storage chips, there is the opportunity for a dual perspective of "cyclicality" and "growth". Therefore, when it falls back to around "P/B = 1", the Dolphin also begins to pay attention.
This article mainly revolves around Micron's specific business and the basic situation of the storage industry, and in the next article, the Dolphin will conduct performance measurement of the company and give investment opinions.
The following is Longqiao Dolphin's specific analysis of Micron:
I. Micron Company: Focused on Storage
Micron's stock price fell nearly 50% last year, and the performance of the company itself was also not good. Looking at Micron's latest financial report:
In the fourth quarter of fiscal year 2022, the company achieved revenue of only $4.085 billion, a year-on-year decrease of 46.9%, and both the DRAM and NAND businesses experienced significant declines. The stock price often reflects the market's expectations. Although the company's second-quarter revenue still maintained positive growth, the stock price has begun to show a significant decline. By the fourth quarter, Micron's revenue also showed a "waist-deep" decline as expected.
Considering Micron's business in detail, the company's revenue is mainly driven by DRAM and NAND, with the two accounting for more than 95% of the total income. Among them, DRAM is the company's largest source of revenue, accounting for more than 60% in the long-term period. Therefore, the analysis of Micron's business mainly focuses on the analysis of DRAM and NAND.
2. Storage chip market: The advantage of the first echelon is obvious
DRAM and NAND are the two main types of storage chips, which are commonly known as "memory" and "flash memory" respectively. The two types of products account for more than 90% of the global storage chip market.
① DRAM (Dynamic Random Access Memory): commonly known as "memory stick." It uses the amount of charge stored in a capacitor to store data and requires timing circuits to overcome capacitance leakage problems. The data exists when power is on and is lost when power is off. It is commonly used in large-capacity main memory, such as computer, smartphone, server memory, etc.;
② NAND (flash memory): A type of non-volatile memory (ROM), which can store data even after power failure, usually used for external storage. It is similar to the hard disks we often mention and is a type of flash memory used for SSD solid-state drives, U disks, etc.
Although DRAM and NAND may sound unfamiliar, they are actually the "memory" and "hard disk" we usually refer to. For example, when buying electronic products such as mobile phones and computers, many people pay attention to the storage capacity of memory and hard disk.
After understanding the basic storage products, let's take a look at the overall storage market:
1) The global storage market size: about 150 billion U.S. dollars. The global market once experienced a significant decline in the industry under the influence of the industry's winter in 2019, and then gradually recovered with the downstream demand. Although the industry began to decline again in the second half of 2022, WSTS expects the global memory market to still reach 155.5 billion U.S. dollars for the whole year.
2) The downstream distribution of storage demand in the storage market: As the storage market demonstrates obvious buyer-side market characteristics, the industry's situation is mainly affected by the downstream demand side. From the current downstream demand distribution of storage, it can be observed that "mobile phones> servers> PCs> other."
In terms of ①mobile phones: it roughly accounts for nearly 40% of the current storage market demand. Currently, "memory" and "flash memory" have become the standard configuration for mobile phones. With an annual shipment volume of more than one billion mobile phones, it constitutes a huge user base. As the demand for mobile phone performance and shooting increases, the need for higher storage performance per mobile phone will continue to increase. However, it cannot be ignored that since smartphones have become a mature market, the increase in storage demand on the mobile end is unlikely to bring about significant growth;
In terms of ②servers: it roughly accounts for 30% of the current storage market demand. Compared to consumer products, servers have higher storage requirements. With the launch of new generations of server CPUs from major manufacturers such as Intel and AMD, there is hope to stimulate the upgrading demand of the server market. The upgrading process from DDR4 to DDR5 will help bring significant improvements in product performance such as faster speed, lower power consumption, and higher efficiency. Micron expects the penetration rate of DDR5 in servers and PCs to reach 50% by 2024;
In terms of ③PC: it roughly accounts for 20% of the current storage market demand. "Memory" and "hard disk" are also important components of computers. As the computer market enters a stable state, ordinary users no longer pursue the performance of the computer excessively. Therefore, the demand for storage in the PC area is more related to the overall market shipment volume. The PC market entered the inventory destocking stage in the second half of last year, and is still in the final stage of inventory destocking. However, the future PC market will still find it difficult to bring more increments to storage.
Overall, mobile phones, servers, and PCs account for nearly 90% of the demand in the storage industry. Currently, mobile phones have brought certain increments relying on users' pursuit of performance, while PC has been unable to contribute much incremental demand. Future growth will primarily focus on the server field.
The training and application of large models such as ChatGPT will bring an increase in demand for underlying computing power, further promoting the demand for server storage chips. Faster response of large model applications requires a large amount of data. The more data storage, the faster and more accurate the application response. According to Trendforce's expectations, benefiting from new applications in AI and HPC, the proportion of server DRAM production output will exceed that of the mobile phone end in 2023, and is expected to continue to rise in the future.
3) Current Competition in the Storage Market
Having learned about the general situation of the storage market, let's return to the company, where does Micron stand?
Let's first look at the market share:
①DRAM: Samsung occupies more than 40% of the market share, firmly in the leading position. Hynix closely follows, while Micron occupies more than 20% of the market share and ranks third. The top three companies (CR3) collectively account for 95% of the market share of DRAM, basically monopolizing the market. From the perspective of storage market concentration, the barrier to entry for the entire industry is high, and the top five companies basically occupy more than 90% of the market share. In contrast, the barrier to entry for DRAM is higher, and the mainstream players in the market are only Samsung, SK Hynix, and Micron. In terms of market share, Samsung, SK Hynix, and Micron basically monopolize the entire DRAM market. In terms of technical capabilities, all three companies have released products based on design rules (D/R) at the 15nm and 14nm levels for DDR4, DDR5, and LPDDR5 applications. Samsung is the most aggressive and the earliest supplier to adopt EUV lithography technology in DRAM, which has been applied to D1x DDR4 DRAM modules and D1z LPDDR5 mass production. Micron and SK Hynix are both still using ArF-i-based double exposure for the D1z node, but they are both in the leading position among other competitors. Unlike DRAM, NAND competition is relatively fierce. The top five manufacturers are still in a relatively leading position, and Micron is also in the top tier. However, overall, the differences among all NAND market players are relatively small. Overall, Samsung still occupies a leading position in the storage market. SK Hynix and Micron are close behind and can both be regarded as first-tier companies in the DRAM and NAND fields. Dolphins chose Micron as its current research object for the storage industry, mainly considering that Samsung's storage business accounts for less than 50% of the entire company's business. Micron and SK Hynix focus more purely on storage business, and SK Hynix is not listed on the US stock market, while Micron is listed on the NASDAQ as a top-tier company. III. Micron and the Storage Industry: Cyclical Features
What do we make of Micron's nearly 50% decline in the past year? It's not just Micron - Hynix also experienced a decline of more than 40% last year. In light of each company's own situation, Dolphin believes that this decline is mainly due to industry factors.
As we have discussed before, the storage market is a buyer's market. Because of the characteristics of this buyer's market, storage has a certain cyclicality, and product prices are also influenced by downstream market demand.
"A rise in price indicates a shortage of supply, while a fall in price indicates an excess of supply." Market prices directly reflect the supply and demand situation in the storage market. Thus, grasping changes in the cyclical nature of the storage market depends on tracking product prices.
There are generally two types of market prices for storage products:
1) Spot prices: The prices of spot goods circulating in the spot market. Spot goods generally enter the market through secondary manufacturers or agents and form prices and markets thereafter.
2) Contract prices: Prices for orders placed by large companies. The contract prices ordered by first-tier manufacturers (such as Apple, Sony, Lenovo) and second-tier manufacturers (such as Taiwanese module manufacturers) to large storage companies (Samsung, Hynix, Micron) are included.
Although there is some connection between the two prices of storage products in the market, there is still a slight difference. Spot prices more directly reflect the current supply and demand situation in the market, while contract prices reflect the market's expectations for orders placed by large companies.
1) DRAM market price: Currently, the mainstream DRAM product on the market is the DDR4 product. The spot price of DDR4 products has been consistently declining since the second half of 2022, which directly reflects the current market oversupply situation, and the industry as a whole has entered a downtrend.
If we look back at DDR3, DRAM shows obvious cyclicality. The DRAM price showed a downward trend from 2019 to 2020, while Micron's stock price also declined frequently. After DDR4 became the mainstream product on the market, product upgrades directly raised the average price of products, and Micron's stock price doubled from the bottom.
2) NAND market price: Overall, NAND prices are relatively stable, with fluctuations smaller than DRAM prices. However, looking at changes in the three contract prices, the overall expectations of large companies for NAND prices starting in the second half of 2022 were relatively weak. This also reflects an oversupply situation in the storage industry on the NAND side.
Combining the price changes of DRAM and NAND, the entire storage industry is still in a situation of oversupply, and the industry is still in a downward cycle. However, at the same time, we can see the cyclical characteristics exhibited by the storage industry.
Regarding the expectation of industry downturn and product price decline, it has already been reflected in the stock price plummeting by 50%. For companies in cyclical industries, buying in at the bottom of the cycle is often the best strategy. As long as there is demand for storage products, the industry will always recover. With companies such as Micron starting to reduce capital expenditures and accelerate inventory clearance, the industry will also have an opportunity to rebound.
In this article, Dolphin will mainly focus on Micron's specific business and the storage industry. In the next article, we will evaluate the company's performance and give investment advice.
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