Impact of 20nm on Micron’s earnings
Micron Technology (MU) is the only US DRAM (dynamic random access memory) manufacturer and has been struggling with high production costs, as compared to Samsung (SSNLF) and SK Hynix. For this reason, Micron decided to ramp up its production on the 20 nm (nanometer) node but faced several technical difficulties, which increased its production cost and reduced its gross margin. MU’s gross margin fell from 27% in fiscal 4Q15 to 25% in fiscal 1Q16 to ~20% in fiscal 2Q16.
Micron planned to produce more than 50% of its DRAM output on 20 nm in fiscal 3Q16, and the cost benefits were supposed to be visible in its fiscal 3Q16 gross margin. As Baird analyst Tristan Gerra said, “We expect DRAM pricing to decline by about 10% a quarter for the rest of the year, while Micron has an opportunity for a 10-15% improvement in its DRAM cost structure in 2H16 versus 1H16 as a result of an improving 20nm mix.”
Move to the 1X node
If the company successfully realizes 20 nm cost benefits, its gross margins are likely to increase to low- to mid-20% in fiscal 3Q16. With DRAM prices continuing to decline, Micron is moving ahead and is ramping up DRAM production on the 1X node at its Taiwan (EWT) plant. This node would reduce costs by more than 20% as compared to 20 nm.
However, TrendForce stated that with each shrinkage in node technology, complexities will increase and will have a marginal effect on profitability. This again raises the question of Micron’s investment in DRAM.
However, Micron has shifted its capital expenditure toward the more stable market of 3D NAND. The company is investing 33% of its $5 billion in capital expenditure on DRAM, and 50%, or $2.5 billion, on 3D NAND. Meanwhile, its memory partner, Intel (INTC), is investing $1.5 billion on 3D NAND capacity.
Next, we’ll look at the opportunities NAND market brings for Micron.