When Do Rising DRAM Prices Translate into Higher Profits?
Explore how DRAM prices affect earnings through shipment volume, product mix, and cost per bit. Calculations also show why applying spot price increases directly to quarterly profits can be misleading.
Higher DRAM prices translate into profits only when they flow through to realized selling prices and are supported by shipments and costs. Spot quotes for a particular specification and a company's overall DRAM average selling price cover different things and cannot be treated as the same indicator.
First, Identify Which Price You Are Looking At
When reviewing DRAM price data, first note the specification, capacity, sales channel, and survey period. Prices for individual components traded in distribution markets do not directly represent prices for modules supplied to server customers or prices under long-term arrangements. Even if prices surge at month-end, shipments delivered early in the quarter may have been subject to earlier terms. Rather than calculating quarterly revenue directly from a price chart, start by aligning the company's reported change in average selling price with bit shipments over the same period.
Calculate Revenue Growth and Profit Growth Separately
Micron's annual report explains changes in memory revenue in terms of average selling prices and bit shipments. Using this framework, revenue can be broken down into total capacity sold multiplied by price per unit of capacity. To estimate profit, connect these figures to manufacturing cost per bit, inventory costs, and R&D expenses. If increasing shipments required running an expensive production line or incurring higher initial process costs, profit may not rise as quickly as revenue. When examining earnings reported in Korean won, separate the effects of the sales currency and the exchange rate used for translation.
When Inventory Valuation Distorts Profit Comparisons
Inventory carrying amounts written down during a price downturn can alter cost comparisons when that inventory is subsequently sold. IFRS IAS 2 sets out the principle of comparing inventory cost with net realizable value. However, detailed accounting treatment is not always the same for U.S. and Korean companies, so follow the actual notes to their financial statements. In a quarter when prices recover, record improvements in normal manufacturing costs separately from inventory-related effects. Without this distinction, it is easy to project a temporary accounting improvement into sustainable earnings for the next quarter. Also consider whether customers delay purchases or use existing inventory first after prices rise. In the following quarter, compare actual ASP and shipments with the combination you expected to test your pricing thesis.
Worked example
Hypothetical example: If the bit shipment index rises from 100 to 110 and the price per bit increases from KRW 2 to KRW 2.2, the revenue index rises from 200 to 242, an increase of 21%. This differs from the 20% obtained by simply adding the 10% increases in price and volume. If cost per bit remains at KRW 1.5, gross profit rises from 50 to 77, an increase of 54%. Because the calculation excludes fixed operating expenses and exchange rates, this should not be called operating profit growth.
What to check
- Check whether spot prices, contract prices, and company ASP cover the same scope
- Align the comparison periods for prices and bit shipments
- Separate inventory valuation effects from manufacturing cost improvements
- Distinguish exchange rate effects from actual dollar selling prices
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.