More big picture thoughts on Micron, the DRAM market, and profitability.
I never thought this stock would be anything but volatile as its price and the overall industry recovers, but I still think it bears looking at the big picture on all this.
Assumptions
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1. The overall semiconductor and DRAM markets are recovering, and we are headed into a strong semiconductor growth cycle. Drivers for this include PC's (shipments are up 15% this past Q4, according to Dataquest, and base memory in PC's is going up at a 72% compound annual growth rate from 1996 through 2000; indeed, base memory in PC's shipping this year is estimated to be 102MB, and next year, it will be 145MB.) Overall demand is going up enough that wafer contract prices are rising in Taiwan. (http://www4.techstocks.com/~wsapi/investor/reply-7611947)
2. There will be strong growth in memory demand from areas other than PC's. One example is digital cameras. (See www4.techstocks.com
3. The cancellation and postponement of semiconductor fabrication facilities by Japanese and South Korean manufacturers means that there will NOT be enough DRAM to meet demand over the next six to twelve months. Nothing that can be done about it at this point--it's a done deal. Why?
From the time a semiconductor company says, "yes, let's go ahead and commit to building a fab," it will typically take semiconductor equipment companies anywhere from at least three to six months to deliver the equipment. (and right now, equipment companies are seeing their delivery times stretching out….) At that point, the semiconductor company must get the equipment installed and broken in, requiring at least another few months. The bottom line here is that even if Hyundai or Toshiba commits to reviving or moving forward their capital expendures planning, there's still a significant lag time before production from that capacity hits the market.
Intel investing $500M in Micron, $100M in Samsung, and possibly more money in Toshiba, NEC, and Matsushita to get them all producing RDRAM isn't so much an indicator of too much supply in the near future as it is a strong indicator of Intel's being very scared (to the tune of $600M so far!) that there won't be nearly enough DRAM supply to meet demand. And by the way, it's not nearly a done deal that any of the three Japanese companies will accept Intel's offer. (http://www4.techstocks.com/~wsapi/investor/reply-7612879)
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So given all of those assumptions as a base, it is difficult to imagine the next six to eighteen months being anything but very, very good for Micron. When times are tough, and there is oversupply and underdemand, Micron is in a business where they hemmorhage money. When times are good, they make a LOT of money…and we do appear to be going into some very good times.
Shorter-term, what are we looking at?
On the negative side:
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1. The misstatement of numbers that does seem to be getting some airplay by the press. Knowing what I do about Micron and the quality and integrity of their management team, however, I have to believe that this was in some way an error of omission, as opposed to an error of commission. I believe it will likely blow over or be explained away.
2. The stock has moved up a lot in a relatively short period of time and may well be due for a correction as people take profits. That seems to be what's happening today all across the market. Micron doesn't seem to be getting overly punished for either #1 or #2 of these negatives so much as it just seems to be along for the same ride everyone else is taking in the semiconductor and semiconductor equipment market today. If you believe today's down session is indicative of a longer-trend, then you should probably bail out now (or get going with the puts.) Otherwise, today is just another buying opportunity.
On the positive side:
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1. The mess in South Korea with Hyundai and LG Semicon may _not_ get resolved anytime soon. (http://www4.techstocks.com/~wsapi/investor/reply-7613470) The striking LG workers are doing great things to increase the spot pricing and forward contract pricing of DRAM, and we have not likely yet seen just how big an impact this will have on Micron's profitability. This strike is probably a short-term thing, but while it lasts, it's going to be sweet.
And even when/if they do finally consummate the deal, it's going to take them time to integrate their operations and start getting more product to market. While the strike is likely a short-term thing, the ability of Hyundai/LG to get their fabs ramped back up and producing is more of a medium- to long-term thing.
2. Sales of chips this year are expected to be up 15%, according to Dataquest (http://www4.techstocks.com/~wsapi/investor/reply-7616388), and sales of memory chips are expected to rise due to Y2K demand for replacement computers. Dataquest specifically noted that this would benefit companies such as Micron.
3. All the technology tout fests going on this month.
Overall, I am obviously bullish on Micron, and I am definitely long on the stock. I would welcome back thoughtful commentary and feedback on the issues raised here.
Regards,
SlowThinker
P.S. Thanks, DJBEINO, for all the great news postings today! |
