For memory makers whose shares have long been trading at very low multiples, industry trends have become a little more encouraging lately, even if we're still far-removed from the boom times of 2017 and early 2018.
DRAM/NAND flash memory giant Micron (MU) rose 4.2% on Wednesday, and NAND/hard drive giant Western Digital (WDC) rose 3.2%, amid a 1.3% gain for the Nasdaq. Bullish notes from Deutsche analyst Sidney Ho and Mizuho analyst Vijay Rakesh may have helped, and so might have a guidance hike from Taiwanese DRAM maker Nanya Technology.
In his note, Ho, who has a Buy rating and $55 price target on Micron, observed that DRAM prices remain about 10% above June levels following a July spike that followed major price declines. Ho forecast that Micron's fiscal Q4 (it ended in August) will represent the "trough quarter" for the current memory down-cycle. He also pointed out that equity markets typically begin pricing in the end of a cycle a quarter before business conditions improve.
Rakesh raised his Micron price target by $6 to $50, and his Western Digital price target by $3 to $54, while reiterating Buy ratings on both. He observed that NAND prices, which appear to be benefiting from Apple's (AAPL) seasonal iPhone production ramp, have bounced some from their July lows. And though he's more cautious about near-term DRAM pricing trends amid elevated inventories among memory makers, Rakesh thinks Micron's August quarter gross margin could beat a consensus forecast for an 8-percentage-point sequential drop when the company reports on Sep. 26.
Nanya, for its part, reported that its August revenue (though down 36.6% annually) rose 14.1% relative to July, and said it now expects its DRAM bit shipments to grow 25% sequentially in Q3, up from prior guidance for mid-teens growth. Notably, Nanya also said that its DRAM average selling price (ASP) rose by a low-single digit percentage relative to July, and asserted that "DRAM supply-demand dynamics are stabilizing."
Nanya's guidance hike comes a little over two months after Micron said it expects 2019 DRAM industry bit shipments to grow by a mid-teens percentage, slightly improved from a prior outlook for low-to-mid teens growth. It also follows a calendar Q2 earnings season during which Samsung, Western Digital and chip equipment maker Lam Research (LRCX) all provided some reasons to think the memory industry is nearing a bottom. Among other things, Samsung indicated DRAM purchase by cloud giants are starting to pick up, Western observed that average solid-state drive (SSD) capacities are rising sharply with the help of lower NAND prices and Lam forecast that -- following major capital spending cuts from memory makers -- DRAM and NAND supply growth rates will both exit 2019 "well below [their] long-term demand trend lines."
Both the DRAM and NAND industries still face some meaningful risks. While cloud capex appears to be improving, PC demand looks relatively healthy and lower prices are leading to higher memory capacities for various products, smartphone demand pressures in China and elsewhere could be a headwind in the coming months, as could soft enterprise server and storage demand. And there's still some risk that the further escalation of U.S.-Chinese trade tensions will hurt industry demand.
But on the flip side, Micron and Western still only trade for about 4 times what they earned during their 2018 fiscal years amid the last boom cycle. Even though it's likely to be a while before either company's earnings returns to those levels -- in Western's case, the cannibalization of hard drives by SSDs is likely to remain a headwind -- recent memory industry news and commentary suggests the current down-cycle could end without doing as much damage as many apparently feared.
