Memory prices fading fast
Published: 20 Dec 2000 17:04 GMT
And you think PC companies have it bad.
Memory prices have been on a downward trajectory for the past three months, a situation that seems to promise shrinking profits and excess inventory for the next few quarters and consolidation over the longer term, analysts say.
The effects of the price slide may become clearer Wednesday after Micron Technology, one of the top three memory makers, reports quarterly earnings.
The contract, or wholesale, price generally paid by major PC manufacturers for 64-megabit DRAM chips is now around $3.80, according to Eric Ross, an analyst at Thomas Weisel Partners. In the first week of October, the same chips were selling for $7.50.
Spot, or surplus, prices for 64-megabit chips are now around $2.85.
"The prices are tracking down about 5 percent a week," said John Joseph, an analyst at Salomon Smith Barney.
Brian Matas, vice president of market research at IC Insights, added that "it will take until mid-2001 to work through this inventory bubble."
The slide, and a prognosis on when it might end, will form the backdrop for Micron's earnings report.
As of Tuesday, the official consensus estimate for Micron's fiscal first quarter on First Call/Thomson Financial was 64 cents a share. Many analysts, however, are likely ratcheting down their estimates, and the "whisper" number is lower. Indeed, estimates came down to 61 cents a share on Wednesday.
Salomon's Joseph and Joe Osha of Merrill Lynch predict 50 cents and 57 cents a share, respectively. Ross pegged earnings at 40 cents a share on revenue of $1.8bn, which includes $200m from Micron Electronics, which makes PCs.
Osha and others generally agree that Micron will weather the storm better than most companies. The company has lower manufacturing costs than most of its competitors and is sitting on billions in cash -- it also is gaining market share. Nonetheless, the downward trend in prices and excess inventory will affect it. At the end of the February quarter, Micron is likely to be close to the break-even point, Joseph said.
"Prices are going to stay depressed and go even lower," Ross predicted.
It's a rough turnaround for an industry many predicted would see rising prices and tightening demand earlier this summer. Unexpectedly strong demand for PCs in the first half led to shortages and rising memory prices. Manufacturers forecast a seasonally stronger second half.
Instead, PC sales dropped. To compound matters, Micron, Samsung and other manufacturers continued to shrink the size of their chips through manufacturing improvements, which has added to the volume of production. It is difficult to assess how much excess memory is available on the market, as it is spread among PC makers, distributors and memory manufacturers.
With prices wallowing near manufacturing costs, it won't be long before some smaller manufacturers leave the industry or severely curtail production.
"Hyundai is clearly pulling back; so are Mitsubishi and Fujitsu," Osha said. "The decline in pricing since the end of the summer has been really dramatic."
While some companies may be bought or could form joint ventures, others may merely fade out. The larger companies already have more advanced manufacturing facilities, Ross noted, and it is often cheaper to improve existing facilities than to retrofit an acquired competitor.
"Much of what the DRAM guys do is grow capacity through shrinks," Ross said. "I think it will be consolidation through death, not purchase."
In the end, this could leave a memory industry dominated by the big three--Samsung, Micron and Hyundai -- with the fourth spot in the market filled by Germany's Infineon or Elpida, the NEC-Hitachi venture. Both companies are investing in new factories that will use 300-millimeter wafers, which lowers costs, but Infineon is seen as being more aggressive in these plans.
"It is an interesting race that is shaping up," Matas said.
Oddly enough, the slide could help Rambus. While Rambus memory remains far more expensive than standard memory, that higher price gives an incentive for manufacturers to dedicate resources to it. Rambus is the only kind of memory that can be used in Pentium 4 computers.
"In a perverse way, this weakness is good for Rambus," said Osha, explaining that memory makers might be thinking, "If I can get extra for making Rambus, I will."
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