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Key Factors that Impacted Micron’s Fiscal 3Q15 Results

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Falling DRAM ASP coupled with sluggish demand in PC market led to Micron’s poor performance in 3Q15

In its fiscal 3Q15 earnings release, Micron’s (MU) management blamed the sluggish demand for personal computers (or PCs) and sequential decline in DRAM average selling prices (or ASP) for its lower-than-expected fiscal 3Q15 results. Micron expects this sluggishness to continue and as a result provided tepid 4Q15 revenue guidance. As a result, Micron’s shares fell steeply.

Intel (INTC) leads the semiconductor space. It is followed by Samsung and Qualcomm (QCOM), as the above chart shows. Micron and SK Hynix commanded the fourth and fifth position in this space, respectively.

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DRAM prices are expected to decline further

According to Kevin Rottinghaus of Cleveland Research, DRAM contract prices declined by ~13% to ~$27 in 4Q14. SK Hynix saw a 4% sequential decline in its DRAM ASP in Q1. According to Romit Shah, a Nomura analyst, “a recent Chinese (MCHI) trip indicated downside risk to DRAM prices is mounting as inventory levels are rising amid weak set demand.” He also added that the mainstream DDR3 PC spot prices have fallen by ~15% on a quarter-over-quarter basis in the current quarter.

Weakness in the euro has led to an increase in prices that has crimped DRAM demand and made inventories rise. It has also pressured the demand. Moreover, Samsung and SK Hynix capacity expansion plans in 2H15 and 1H16 “could push out the timeframe for pricing stability to transpire.”

According to Northland Securities, Samsung has purchased more DRAM equipment in the recent past with the aim to ramp up its capacity. This is not good news for Micron, as it is bound to feel the pressure since it’s a high cost DRAM producer. DRAM price cuts are expected to deepen as Samsung is ready to accept lower margins while increasing its output. Samsung’s efforts to increase DRAM output and gain market share will hurt Micron’s ASP and margins.

If you are bullish about Micron Technology, you can invest in the Technology Select SPDR ETF (XLK). XLK invests about 0.77% in Micron.

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