Memory Market Down, but a Turnaround is Coming

[Post updated 14 Feb. with Kioxia data, a margin chart, and to correct an error.]

The quarterly results of most memory companies have been reported, and revenues, gigabyte shipments, and prices are all down.  Most of the profits have been taken out of the business.

This is not an unusual situation for the memory market, although it is certainly painful every time that it occurs.

The Memory Guy blog will tell you in this post just how much the market has been impacted, and how the cycle is likely to develop over time.

Memory Revenues

The World Semiconductor Trade Statistics (WSTS) for the full 2022 year were released on Feb. 3, showing that total 2022 memory revenues were $130 billion, with $79 billion of that, or 61%, sold in the first half, and the second half only accounting for $51 billion or 39%.

The combined revenues of the leading memory vendors show a similar drop-off.

The Price Fall

The easy way to look at price is through the spot market.  Although this pricing represents a very small portion of total memory revenues (under 5%), it is generally accepted as a leading indicator of where contract prices might go.

The chart below plots the lowest spot prices for DRAM and NAND flash from a variety of sources.

From their peaks in late February NAND spot prices fell 59% and DRAM 60%.

While memory suppliers only give rough indications of their own pricing, those indications can be plotted out something like this for DRAM:

Curves for normalized DRAM ASPs from 1Q21 to 4Q22 for Samsung, SK hynix, and Micron. All went up by about 30% in early 2021, dropping baclk to about 20% in early 2022, then plunging by 20-40% in late 2022

While NAND pricing seems to have behaved something like this.

NAND flash suppliers' normalized ASP 2021-2022. Prices remained pretty even until the second half of 2022, when they dropped by about 40%.

These charts all start with 4Q20 being set to 100% for each manufacturer, and the quarterly declines are applied to that.

Both DRAM and NAND flash prices fell by around 40%.  Micron’s smaller decline is more due to the fact that the company’s quarter ends one month earlier than its competitors, so that line should reasonably be slid to the left by a month.  That would make it line up more closely with the others.

As I understand, NAND flash started its fall with lower margins than DRAM, although this has not been publicly disclosed by any of the suppliers.  If this is the case, the NAND flash price fall should end before the DRAM price fall.  The spot prices in this post’s first chart indicate that this may have already occurred.

In their most recent earnings reports, Kioxia, Samsung, and SK hynix have disclosed that they have taken inventory write-downs as a result of this.  Micron and Western Digital have not.  Inventory write-downs are taken when the cost of the inventory is higher than the market price of the product in inventory.  This tells us that certain Kioxia, Samsung, and SK hynix parts are currently selling below their production cost.  The fact that Micron and Western Digital have not taken write-downs indicates that they may have better cost structures than their competition.  This would imply that Micron’s process leadership has indeed provided the company with a better cost structure than its competition, despite Samsung’s assertions to the contrary.  For WDC, it seem to prove that the structure of the Kioxia JV is working in WDC’s favor.  The reason for this is explained in detail in an Objective Analysis Brief about this which is available for purchase on our website.

Gigabit Demand

The price collapse was driven by the sudden cancellation in customer orders for both DRAM and NAND flash in both the datacenter and in other markets.  The data center demand lapse resulted from the return to work in many countries, and the subsequent reduction in demand for online services, since work-from-home, study-from-home, and similar trends have reversed.  PC demand has lapsed for the same reason, but smart phone demand has also dropped, but for the opposite reason.  Recent COVID lockdowns in China have negatively impacted smart phone demand.  The global economy’s downturn has also had a hand in the decline.

Once again, leading vendors have shared their gigabyte shipments in relatively vague terms, but with enough detail for us to share the clear signs of a decline in gigabyte shipments.  Here’s what has happened in DRAM for the top three vendors.

Normalized quarterly gigabyte shipment curves for the three leading DRAM vendors for 2021 & 2022. All varied between 10-20% hoigher than 4Q20 until the second half, when they all dropped either to the same level as 4Q2o (Samsung, SK hynix) or to 20% below 4Q20 (Micron)

Micron seems to have performed the worst, dropping to 86% of 4Q20 shipments by 4Q22, but the others remained above 100% of 4Q20 shipments for the span of this chart.

NAND experienced a relatively similar trend, except that Micron was the only company to see a sharp decline throughout the second half of 2022, and SK hynix enjoyed unusual growth.

Normalized NAND flash quarterly gigabyte shipments 2021-22. Most companies vary between 100-120% of 4Q20, with Micron dropping to 88% in 4Q22, but SK hynix grew significantly starting in 3Q21, to 211% by 2Q22 before dropping to 185% in 3Q22 and 197% in 4Q22.

SK hynix grew its NAND shipments significantly over the course of this chart, doubling 4Q20 shipments by 1Q22, and raising to 211% by 2Q22 before falling back to a slightly lower level.  This is probably due to a breakthrough the company enjoyed when it was finally able to regain NAND profitability in the third quarter of 2021.

Impact on Margins

Naturally the price declines have had a strong negative impact on profitability.  The chart below shows the operating margins of the leading memory manufacturers.  WDC shares gross margins for its flash business, so its operating margins will be somewhat lower than those shown in the chart.

Column chart of 2021-22 quarterly profit margins for top memory manufacturers.  Most were profitable for this entire period except for 4Q22, when SK hynix and Kioxia had significant losses, Micron had a small loss, Samsung had a small profit, and WDC's margin was 15%.

The two companies that are doing the worst are Kioxia and SK hynix, with WDC faring pretty well.  I’ll repeat that the structure of the Kioxia/WDC JV works in WDC’s favor for reasons detailed in an Objective Analysis Brief.

The most important statement of this chart, though, is that margins are nothing at all like the mid-30% range that was enjoyed for the bulk of 2021-22.

Outlook – Stabilization

Referring back to the first chart, price falls for both DRAM and NAND flash seem to be slowing, but the NAND flash price fall seems to have started to slow about three months before DRAM.  NAND prices may have hit cost, and we might guess that the bulk of the inventory write-downs at SK hynix and Samsung were for NAND flash.  Naturally, all of Kioxia’s write down was NAND flash, since that’s the company’s sole product.

In memory price cycles, prices tend to fall to cost, and then follow the declining cost curve until the next shortage.  Cost curves decline around 20% per year for DRAM and 30% per year for NAND flash.  It would be fair to assume that, barring a sudden resurgence of demand, NAND flash prices will decline by 30% this year, and that DRAM, which hasn’t yet reached cost, will decline by more than 20% in 2023.

Objective Analysis pays close attention to pricing, and we understand what happens at each phase of the memory price cycle.  Your company can benefit from this understanding.  Contact us to explore ways that we can work together to make your company excel in both good times and in bad.