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Talk of DRAM Shortage Powers Chip Stocks
By Rivka Tadjer
For the first time in what seems like forever, the stocks of
long-suffering semiconductor manufacturers are flying high again.
After being pummeled by the Asian crisis and the market's recent
selloff, many of the best-known semiconductor companies are within
shouting distance of their 52-week highs: Texas Instruments, for one, is
trading at 61 13/16, less than 10% below its 52-week high of 66 29/32.
Intel, a longtime laggard, has come roaring back and now changes hands
above 90, near its March peak. Even memory chip maker Micron Technology,
which got no respect for months, closed at its 52-week high of 40 3/16
Tuesday.
What seems to have gotten Wall Street so excited about these stocks are
reports of a DRAM shortage next year. Market research firm Dataquest
recently came out with a report suggesting that increased demand for
memory in PCs, coupled with less supply of dynamic random access memory
chips (DRAMs) from fewer plants, will result in a shift back to more
demand than supply, and therefore a shortage.
That can't help but boost prices, which look like they have nowhere to
go but up. In two years, RAM prices have gone from about $52 per megabit
to today's sub-$2.00 per megabit price. That sounds like Moore's Law on
speed.
But now that supply has ebbed, due in large part to the closing of
several fabrication plants in the wake of the Asian economic collapse,
prices are expected to rise. In addition, the demand for more RAM and
greater CPU power looks like it has no end in sight. All those trends
have powered these stock prices higher.
Some sell-side analysts who cover the semiconductor business doubt the
shortage will last, and they're cautious about predicting such a
volatile business as DRAM prices. "I'm doubtful about&hellipa DRAM
shortage," says Mark Edelstone, semiconductor analyst at Morgan Stanley
Dean Witter. "I expect an evening out of supply and demand. Perhaps
there will be some spot shortages&hellip, but no broadbased shortage."
The DRAM supply-and-demand curve aside, Edelstone does think that the
evidence points to a true market comeback. "I think the second quarter
was the inflection point for the industry; we clearly saw things get
better in the third quarter and will see a more meaningful improvement
in the fourth quarter, because the strong seasonal demand for PCs will
continue to absorb excess supply." The third quarter, Edelstone points
out, also showed sequential revenue growth for the first time in a year.
But perhaps more important, he says, is that these companies' operating
margins probably bottomed out in the second and third quarter. "The key
now is that companies are able to reduce costs faster than the prices of
products are declining," he says. That would be a reversal of the
conditions that led to these stocks' declines earlier in the year -- and
would provide the strong earnings growth these stocks recent move has
anticipated.
While they stop short of saying that many of these semiconductor stocks
are now overpriced, people like William Milton, Jr., semiconductor
analyst at Brown Brothers Harriman, observe that many of these
companies' share prices "already reflect a recovery."
The exception: National Semiconductor, the consummate beaten-up
semiconductor stock, which is getting some new attention on Wall Street.
This stock, which repeatedly disappointed investors with poor earnings
reports, has nearly doubled from its 52-week low of 7 7/16. Yet at a
recent price of 12 1/8, it's still around two-thirds off its high of 37
7/16.
Though trading at 25 times Zacks' 1999 earnings estimates of $0.48,
National Semi gets thumbs up from its fans who say its stock price
doesn't yet reflect the semiconductor industry's expected recovery next
year. A new management team has also helped shore up the company's
reputation on the Street.
"The best bargain may be National Semiconductor," says Milton, "because
if we do see substantial growth in the industry, this stock could easily
double. And though that won't put it near its year high, it will be
profitable for those who buy in."
Advanced Micro Devices is another candidate for a bargain purchase, says
Milton. Though its price also has nearly doubled (to 23 7/16) from its
52-week low of 12 3/4, it is still shy of its high of 31 by more than
25%. AMD's stock has benefited from strong demand for the company's K6
chip, which has taken market share from Intel in low-end PCs. |
