DRAM: Micron’s key growth driver
Micron Technology (MU), Samsung (SSNLF), and SK Hynix are facing a probe by China (MCHI) over alleged DRAM (dynamic random access memory) price-fixing. Rising DRAM prices have boosted the three memory chipmakers’ profits, putting them at the top of the world’s five semiconductor companies.
In 2017, Samsung overtook Intel (INTC) to become the largest semiconductor company by revenue. As you can see in the above graph, DRAM contribution to Micron’s revenue increased from 61% in fiscal Q1 2017, when the DRAM price increase started, to 71% in fiscal Q2 2018.
DRAM profit margins
During that period, Micron’s DRAM gross margin almost tripled, from 28% to 66%, driven by increasing DRAM prices and decreasing cost per bit. According to TrendForce, Samsung, SK Hynix, and Micron reported operating margins of 69%, 61%, and 57.5%, respectively, in the first quarter. Samsung has a higher margin since it has the lowest production costs and the highest market share.
While memory chipmakers enjoyed rising DRAM prices, Chinese electronics manufacturers took a hit on their wafer-thin profit margins as high component costs increased their production costs.
Impact of lower DRAM prices on Micron
The last time DRAM prices fell, Micron went into losses since its production costs were higher than DRAM prices. However, the company has succeeded in reducing those costs.
Lower DRAM prices would reduce Micron’s earnings, but the intensity of the decline could be less than in previous cycles. That’s because DRAM demand has broadened beyond PCs and smartphones to servers, automotive, and IoT (Internet of Things) devices. DRAM content per device has also increased.
Moreover, Micron is moving to high-margin specialized products such as automotive DRAM where there are long-term contracts. Even though China’s probe doesn’t pose any major risk in the short term, China’s domestic memory chip production is something investors should keep an eye on. We’ll look at that in the next part.
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