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Has Micron Technology Reached the Peak of Its Memory Cycle?

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Micron’s earnings and memory prices correlated 

Micron Technology’s (MU) earnings have changed significantly over the past two quarters after bottoming out in fiscal 4Q16. Its earnings were driven by increasing demand and the prices of DRAM (dynamic random access memory) and 3D-NAND across all end markets.

Memory is a highly cyclical market. The market witnessed a downtrend in 2015 and 2016 as weak demand for PC (personal computer) DRAM created an oversupply situation in the DRAM market. That pushed Micron into losses. Samsung (SSNLF) and SK Hynix stopped DRAM production to focus on NAND, which stabilized the DRAM supply in mid-2016.

At the same time, DRAM demand increased, outpacing the supply. That caused the DRAM ASP (average selling price) to rise at the end of 2016.

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Micron’s earnings are directly proportional to DRAM ASPs since Micron earns more than 60.0% of its revenue from DRAM. Many industry experts expected DRAM ASP to fall in 2Q17 as seasonal PC demand faded, thereby affecting Micron’s margins. So analysts lowered their ratings and price targets for MU stock.

Memory demand shows no sign of slowing down

DRAM ASP is continuing to grow, however, and isn’t showing signs of falling. In the earnings call for fiscal 2Q17, which ended March 2, 2017, Micron’s then-CEO (chief executive officer) Mark Durcan said the company is seeing a strong demand for DRAM and NAND in the PC, mobile, storage, and embedded spaces.

For instance, Micron’s key customer, Nvidia (NVDA), is witnessing its highest demand for gaming and data center GPUs (graphics processing units). Memory demand from industries such as automotive and healthcare is finally taking off.

As Apple (AAPL) prepares to launch its next iPhone in the second half of 2017, many foundries have diverted their resources to building iPhone components. All this has created a tight supply situation in the memory market, indicating that there’s enough room for growth in memory prices.

Micron’s leadership change

At a time when the memory market is seeing a favorable pricing environment, Micron’s leadership has changed hands. Sanjay Mehrotra, the founder of SanDisk, which was acquired by Western Digital (WDC), has taken on the role of Micron’s CEO, succeeding Durcan.

On June 29, 2017, Micron is set to release its fiscal 3Q17 earnings, which ended in May 2017. It will be the first earnings call with the new CEO. In this series, we’ll see what to expect from Micron’s upcoming earnings.

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