Unlike much of the "noise" on this thread you ask very good questions, and show that you have put a great deal of thought into them. If you could correctly answer those questions, you could certainly make a knowledgeable investment decision. Unfortunately no one else has taken a crack at them, so I will. But that doesn't prove that my answers are correct. I will try to also point out where others on the thread might differ.
1) how are memory prices going up while disks still have problems - The two industries are interrelated, but they also have their own individual problems. For example SEG technically fell behind IBM in the disk drive war as IBM moved first to MR then to GMR while SEG was still in TFI. This allowed IBM to take profitable market share at the high end. SEG is still trying to catch up. These factors affect SEG without having any bearing on the memory market. They also made SEG, RDRT, and APM much better shorts than MU over the last two years, by the way.
In the memory market we have seen some closures of low-end plants (that weren't really important factors anyway), but we are also seeing plant slowdowns of leading edge plants. Basically prices are so low that the Koreans apparently can't afford to sell at those prices, so they are restricting supply to increase prices. This situation is potentially unstable of course, and could break down at any time. But for it to break down, the Koreans will need to lower their production cost sufficiently that they can afford to sell at a lower cost, and reducing cost is difficult without running the plant at full bore.
2) What about AMAT's problems.
Historically the equipment industry has trailed the semis themselves. The semis have run the cycle and are very depleted. Very few can afford new equipment. Thus they will have to make whatever improvements they can with their existing equipment, and the low cost producers will be profitable while others will fall by the wayside. As they return to profitability, the strong semis (whoever they may be) will begin ordering equipment again, and the equipment guys will see stronger sales. But the semis themselves will have to recover first.
Note that in 1997 the equipment guys recovered without the semis. This was because the semis escalated the war, which caused the glut to worsen, and made this second dip even worse. But now the cycle will return to normal and the semis will recover first, followed by the equipment guys. Last to recover will be the companies whose sales depend on new fabs.
3) What about the problems in the mask makers?
This is a good question. I agree that it does show that the semis are in really bad shape and that even R&D is being scaled back. But to me that is evidence that the semis themselves are scraping the bottom of the barrel. Make no mistake. The strong semis like INTC or TXN have the potential to expand market share by taking pieces from the weakened players. MU is certainly a weakened player, but there is no evidence that these strong players want any part of the memory market.
4) If memory prices go up, will the closed fabs re-open?
No. The closed fabs will never re-open for making memory. They were out of date and cost inefficient, and not close to break even. Memory prices will not go up very far if at all. At best they will stay constant, but that is the same thing (see number 7).
5. Does it make sense that the financially strongest players will be the survivors?
Yes. That is the primary premise of MB and skeeter. There are three factors which will determine the ultimate survivors. First of all deep pockets are important. Secondly low cost production is also critical - if your marginal cost is such that you lose money on each piece, even deep pockets are depleted eventually (note: see Korea). Thirdly, you can not forget that this is a game of chicken, and whoever blinks loses. As skeeter points out, MU has no where else to go, so they will play this game until they either win or lose. Other companies such as Hitachi, Matsushita, NEC, IBM, etc do many other things, and if they decide they really don't need the hassles of the memory market, they may go away. TI already did, incidentally, though they clearly had deep enough pockets to stay the course.
This is a point where I differ with the bears. They place more emphasis on current financials and fixed costs, while I place more emphasis on marginal costs. Both are important factors and in making your investment decision you would be wise to consider both points of view.
continued in next post....
Carl |
