Sridhar, I view this as an article which could have been written better. I'm not trying to slam the journalist, but as a former member of that fraternity I have some issues w/ it.
In the paragraph containing the first TK quote, the writer uses the term "analysts say" and goes on to offer the views of only one analyst. Exactly who are the other analysts holding these views? Furthermore, it could reasonably be argued that the analyst the writer has chosen to quote is on the [extreme] fringe of bullish sentiment on U.S. DRAM players. The readers are lead to believe that this "authoritative source" is approaching the subject at hand from an unbiased perspective.
A good journalist smells "spin" and flushes out any possible contradictions in what an interview subject is saying at the moment.
The writer enters the following TK quote into his piece:
"They are pioneering into new higher densities prematurely."
If he/she had done their homework, they might have come to the interview armed with the TK's most recent public comments on the 64 Mbit issue, which came on 6/24/97 in an ML Bulletin on MU, reiterating a near-term accum. due in large part to the fact that "We expect Micron to make a successful transition to the 64 Mb about six months earlier than expected." [SOURCE: TK/ML Bulletin on MU, reiterating near-term accumulate, 6/24/97]
One of the questions I would have asked was "why would Micron being able to enter the 64 Mbit market 6 months sooner than expected be the main reason for your firm reiterating it's rating in light of the fact that what you appear to be saying is that the players who are already selling 64's have in your own words 'a flawed business model?' Aren't you contradicting yourself to some extent?"
And if the response is, "well, they're timing is perfect.", my response would be, "well, can you prove to me that you're adept at predicting long-term price and market trends in this industry, because if the information I have is accurate, two years ago you made an FY'97 estimate for MU which for some reason right now is over 1000% higher than your current estimate. With all due respect, I would say that could be reasonably viewed as evidence that you're, let me put this politely sir, far from infallible at predicting long-term price and market trends in the DRAM industry. Your response?..."
TK is quoted in the EBN piece as saying:
"Asia/Japan is aiming its best capacity at small markets and not
running at full utilization, driving up their average unit cost."
If I was conducting the interview I might have asked some questions about the time frames the interview subject was considering, possible long-term strategic reasons for this resource allocation, and the impact on the current 16 Mbit market if the Asian players actually followed his advice.
For example:
1. How low do you think 16 Mb ASP's would go if Asia/Japan
went full throttle on capacity utilization?
2. What does this do to supply and its impact on market clearing prices?
3. Is the only thing that matters in the DRAM game driving down AUC? 4. Is what you're saying basically "They should just make stuff, because they can. And if they make enough of it, their AUC in the short-term (i.e. in the fabs) will be lower. That's good."?
5. Don't you see an obvious trade-off between (A) maxing out capcity utilization in an attempt to lower AUC and (B)shutting off the supply pipeline in an attempt to see a boost in ASP's?
6. If you were running Samsung's DRAM operations, what's your optimum capacity utilization rate in the 16's? Why?
7. What's the anticipcated repsonse of competitiors? Why?"
In his MU Bulletin, TK opines that MU could get 13% of the world market in the 64's in FY'98. He throws out an estimate for MU of 40 million units.
So, by his own estimates for MU, you can back out a world market figure of 307.69 mil units in 1998. If the SIA estimates 1997 sales at 50-60 million units then the one-year unit growth rate would appear to be between 412.81% and 515.38%. I would assume that the absolute profits on a 64 Mbit chip are greater than a 16.
Obviously only a company with a flawed business model would be crazy enough to want to sacrifice short-term profits in an attempt to position itself for a market expected to grow 515% over the next year and continue to grow, albeit at a possibly slower rate.
Good trading,
Tom |
