Commentary: Micron’s huge AI windfall is bad news for most of us

Commentary: Micron’s huge AI windfall is bad news for most of us Besides having to pay more for your next iPad or Nintendo Switch, soaring chip prices potentially come with other big downsides, says Chris Bryant for Bloomberg Opinion. BERLIN: Computer memory chipmaker Micron Technology’s blowout quarter has, for now, dispelled concerns that the artificial intelligence boom is faltering. But I’m not sure its whopping 80 per cent operating profit margins are good news for the rest of us. The US firm’s revenue in the three months to May was more than four times higher than the same period last year, and it hauled in US$18 billion of free cash flow in that time. It’s the result of massive data centre demand and the huge price increases that phenomenon is triggering well beyond the AI industry. So-called high-bandwidth memory (HBM) of the type offered by Micron is an essential component of advanced AI processors. Data centres also consume a lot of conventional DRAM (short-term working memory) and flash storage. But regular consumer-electronics products need memory and storage, too, and there isn’t enough silicon to go around as the data centres gobble up the chip supplies. On Thursday (Jun 25), Apple raised prices for Macs and iPads by close to 20 per cent, to offset higher memory and storage costs (for now the iPhone has been spared). The company has “never seen a component price increase this much, this quickly,” an Apple spokesperson explained. The same day, Microsoft said customers will have to fork out up to US$150 extra for an Xbox games console - its third price hike in barely a year. Micron says demand for top-end consumer devices is holding up, even though overall PC and smartphone unit volumes are shrinking. DEMAND OUTSTRIPPING SUPPLY Still, memory shortages look intractable because of the length of time needed to build a new chip factory. There’s little chance of this easing before around 2028. With demand outstripping supply, Micron and its South Korean peers SK Hynix and Samsung Electronics have been able to lock in long-term contracts with their customers. This is letting Micron secure bumper revenues and gross margins for years to come, as well as hefty upfront cash payments from the companies that need its products. Micron’s rocketing US$1 trillion market capitalisation will, of course, benefit nearly everyone who holds shares via their 401(k) or S&P500 index tracker. Not to be outdone, SK Hynix announced a blockbuster US stock-market listing this week. Reassuringly, Micron’s management says it will try to minimise the impact of soaring chip prices on vital sectors such as carmaking, defense and medical equipment. The company is also stepping up investments in manufacturing capacity, with capital expenditures likely to exceed US$40 billion next fiscal year, compared with US$27 billion in the current one ending in August. UNSUSTAINABLE But it’s still not fully obvious to me why the broader stock market should cheer these developments. The bullish take is that Micron’s soaring earnings show that Big Tech’s hyperscalers such as Microsoft, Alphabet’s Google and Amazon are still spending wildly. These giant companies must think that, even at these sky-high prices for components, their data centre investments will earn a decent return. However, the more extravagant their outlay, the harder that aim becomes (with the caveat that they’re also getting more computing power for their buck, which can be used for cloud services as well as AI). The hyperscalers’ capex bills are projected to exceed a mighty US$1 trillion next year, with some analysts estimating that memory could account for more than a third of that. This mammoth spending is already crimping Big Tech’s cash flows. But unlike at a consumer-electronics company such as Apple, chip costs don’t yet impact the hyperscalers’ profits by as much. That’s because data centre investments are capitalised on their balance sheets and gradually depreciated over subsequent years, rather than being immediately expensed, as happens at a smartphone or PC manufacturer. The same memory price shock can “look like strategic capex for one buyer and immediate gross-margin pressure for another”, Morgan Stanley analysts note. So the hyperscalers’ earnings still look comparatively decent, even though they’re storing up some serious future depreciation costs. Capex booms in technology are “tremendously accretive to earnings”, renowned short seller Jim Chanos told Bloomberg Money recently, as the same dollar spent in a capex boom “is recognised as profits by one entity and deferred by the people spending the dollar”. Fortunately for them, some hyperscalers are also enjoying a temporary earnings boost from the revaluation of their investments in AI startups such as SpaceX and Anthropic. But those gains likely aren’t sustainable. To counteract rising depreciation expenses, the big tech firms will either have to substantially increase revenue or cut other costs. They’re certainly doing the latter. Oracle’s headcount shrank by 21,000 full-time positions in the fiscal year ending in May. A year ago, it had 162,000 full-time employees. What about the rest of us? Besides having to pay more for your next iPad or Nintendo Switch, soaring chip prices potentially come with other big downsides. There are signs of higher electronics costs stoking inflation, which could force the Federal Reserve to raise interest rates. Bad news if you’re thinking of getting a mortgage. So by all means cheer Micron’s success. Making memory chips is hard and the company deserves success having endured tough times in the past. But, as with higher oil prices, soaring memory prices will sting us all.