Pat, I agree with some of your post but disagree with much of it:
First and foremost I disagree that the competition looks strong. So far as I know, MU is the only DRAM maker that is all .21 micron now, except of course the TI fabs. They are the only DRAM maker moving to .18 in the fabs in the near future. Thus I think that MU is clearly in a strong position from a cost standpoint. MU also has plenty of money to move forwards, unlike some competitors. (LG?) If the competition was in fact strong, they would not be slowing production, but rather would be cranking full bore to try to kill MU. The fact that at $10 they are willing to produce full bore, but not at $8 sure gives you a feel for where they are on costs, doesn't it? And I think MU is lower, probably below $8 now, which is why I think MU will have a good quarter this quarter.
I also disagree that money is a problem. With the backing of INTC and MU, as well as government financing in the joint venture TI fabs, MU has plenty of cash to last at least through the end of 1999, so money is no longer an issue. They have over $1.3 billion on hand and their operations are producing cash, exclusive of new equipment purchases, so buying $1-2 billion of equipment over the next year should not be a problem.
Furthermore I disagree that chips are still not profitable at these prices. With MU at .21 micron, and spot prices at $10 I am confident that MU is profitable. Samsung says that they are making money now, and as I said I think their cost is in the $8-9 range. And as we know, MU is the lost cost maker so presumably their cost is $8 or less.... <G>
Another disagreement is as to the end of the christmas buildup. In the old days where manufacturers inventoried parts and finished machines you are probably right that the christmas buying tapered off after mid-october. However now most computers are built to suit with minimal inventory of either parts or finished computers. Thus I think you will see strong christmas sales well into November and sales will still be pretty strong even into early December. MU said that it would be another month before they could evaluate where pricing would head post christmas.
Next where does demand go after christmas? You think it goes to pot. I think that after year end we will see strong sales of PCs as IT budgets turn from software to hardware. Thus I see 1999 as a year of unusually strong PC demand.
So where do I agree with you? I agree that shrinks increase supply. I agree that prices will begin to fall again sometime in December, though I think the decreases will be small as high-cost producers again slow production to keep the price up. And I agree that this will be an unusually good quarter for them.
As for the stock price, Larry would tell you that the trend is up. <G> Seriously, determining a fair value for this company is tough, and not a useful exercise anyway. If you look at the expected loss in 1999 you might argue that they should be worth $10 or less. On the other hand if demand does catch up with supply in 2000, and MU can earn a positive margin of say $2 per chip, how much money will they make per share with all fabs cranking at .15 micron? Thus I expect that the stock price will continue to reflect marginal news. That is, the stock will go up if good news is announced, and down on bad news. It will also drift in the general direction of the market. What it will not do is move directly to some magic number that is the "real value".
My guess is that for the next several weeks there is more good news than bad, and that the semis as a group will continue to rise, and MU will rise along with them. I expect a market dip before long, maybe thursday, but I don't think MU will drop significantly below 38 before November 15. Beyond that, who knows?
Carl
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