Carl, This cycle will end as it always does, with somebody big or several somebody bigs, leaving the business either just before or during bankruptcy. Who will that somebody be? The Koreans may be obvious choices, but these are big, diversified cos. who can take advantage of any pop in several other markets to shore up their chip problems.
The main problem is that chip capacity is not really being shut down. It is the same DRAM scam played before by the Asians. They are shutting down obsolete fabs while gearing up new fabs and actually adding Mbits to the glut. Carl Johnson of Infrastructure estimates that capacity in Mbits will double this year. Demand, my estimate, isn't even close to doubling. And what demand growth there is is based totally upon lower prices. Win 98 maxes out on 32 MB, but many new boxes have 64 MB or higher as a way to impress the rubes. And why not? DRAM is cheap. But should the chippies try to raise prices, that extra demand for the Hell of it, disappears.
I am not sure that the last two DRAM scams helped MU. They may just have converted them from a perennial loser to dead meat. Yes, they were able to increase capacity, gain market share and earn nominal eps while the Asians held back. However, the eps were phony, as there was negative free cash flow generated and MU took on more debt to fund its activities. MU was left with more capacity at a time when they lose money on every chip they make. That is not good. And they are now fairly swimming in debt they cannot afford. True, this quarter will not show huge new debt or interest expense impact, as they cleverly structured the deal with TXN to pretend that it didn't happen until Sept. 1. These guys are great at make-believe accounting. But it will show up next quarter and things will not be better for MU. The added cost will raise their already huge net cost of producing chips.
Here is how I see it playing out: MU will report a huge loss this quarter, but it will be less of a loss than last quarter. Since the MU bulls are either short term or brain dead, this may give us a last chance to buy puts over $35 on this dog. Then, the weight of over capacity and debt will mean the following quarter will be flat to down (more losses) when the gullibulls are expecting better results. Then we head into the deadly new year. The first thing that will make the bulls take notice is the absence of payment on the converts. Since MU can default for two years without declaring bankruptcy (oh, yeah, those convert buyers are as bright as a Moonless Midnight in a cave -g-), that is the path of least resistance. They will try everything possible, including selling more of MUEI, to bolster their bleeding cash position. The stock will limp into the single digits when bankruptcy rears its ugly head for this co. Again! As it did the previous two DRAM cycles.
Will they make it through to the inevitable upturn, which will probably come about in 2001 or so, this time? Don't know. Don't care. I would kind of miss MU, since it trades with no rationality and allows a permabear to keep on printing money on put buys. But the touty, scammy mgt. team would not be missed. As for the permabulls, they will find something else to sucker into.
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