DRAM and NAND pricing decline
Micron (MU) is the largest US manufacturer of DRAM (dynamic random-access memory) and NAND (negative AND) memory chips, which are mainly used in mobile devices and personal computers. However, the company is facing waning demand for memory chips as a result of soft demand in the smartphone as well as the personal computer (or PC) markets. Weak demand for memory chips resulted in higher inventory, which pressured chipmakers to slash the prices of DRAM and NAND memory chips. The US-China trade fears, as well as a slowdown in China (MCHI) (FXI), also dented chip demand.
Japan’s automotive chipmaker Renesas also announced on March 6 that it is stopping chip production at some of its plants in Japan amid a slowdown in demand from China and to combat excess inventory build-up. Chipmakers Advanced Micro Devices (AMD) and NVIDIA (NVDA) are also facing pressure due to an inventory pile-up.
Margins are hurting
Micron’s gross margin contracted 820 basis points YoY to 50.2% in the second quarter of fiscal 2019. The operating margin also significantly declined YoY from 49.4% to 36.2% in the second quarter. Moreover, both gross and operating margin also dropped steeply from the preceding quarter’s margin levels of 59.0% and 49.1%.
Though the company expects the memory chip market to revive soon, the margins recovery might take a little longer given the excessive inventory pile-up.