Hey Bill, Thought that you'd want to be the first to know that component prices are going down and Dell's Gross Margin is on the way back up. :-)
Let me be the first to congratulate you. :^D
Ian.
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October 22, 1999
--SUMMARY:----Semiconductors
*Demand for high-end microprocessors remained relatively firm in the gray
market last week in front of Intel's mild October 24th price cuts. Low-end
processors were flat as overall demand remained weighted towards the
high-end.
*Other PC related components, however, began to weaken. BX chipset spot
market prices have pulled back from a high of $70 to about $35 currently;
there is talk of better availability for Flash and lower prices ahead.
*DRAMs continued to fall through contract levels for the first time in
about four months. Bellwether 64Mbs that were going for $13.50 a week ago,
traded to $11 on Friday, with low-ball Taiwanese prices as low as $9.
Contract prices edged up to $12; further increases will likely be tough to
implement.
--OPINION:------------------------------------------------------------------
High-end demand remains firm in front of price cuts.
Our checks across the processor landscape last week found demand firm in
front of Intel's (INTC, 1M) 10% average P-III price cut on October
24th. This is a relatively mild cut. Gray market prices for popular
P-III 450 and 500s fell two weeks ago in anticipation, while P-III 550
and 600 prices came down last week. On the week, average P-III prices
declined about 6%, due to the P-III 550 and 600 adjustments. Indeed, the
P-III 450 and 500 remained the most popular in the channel with anecdote
from several distributors suggesting that they were on allocation. In
addition, trading of AMD's (AMD, 3H) new Athlon continued to pick up
last week as motherboard availability improved in the market.
Most of the input from Intel's largest customers, like Dell and Gateway,
remains positive. Even IBM recorded a 12% increase in PC shipments last
quarter, which means units were probably up 20-25%. And input from inside
Intel remains positive, with Xeon shipments picking up.
Even so, we are watching for weakness in some key component prices to
tell us the state of marginal demand, which appears to be running behind
expectations at some corporate resellers, like CompuCom and Inacom. At
the same time, supply is likely improving. In addition to DRAMs, brokers
have seen gray market prices for Intel BX chipsets fall sharply in the
last couple of weeks, from a high of about $70 following the Taiwanese
earthquake, to $35 last week, still a modest premium to its $25 list.
This may be due to better chipset availability, particularly the i810e
(Whitney-133), which has begun to ramp in some very serious volume. In
addition, we are getting some sense that Flash pricing is beginning to
improve. One broker told us the spot price for some 8Mbs have gone from
$35 to $25 in the last week, and he is seeing larger supply lots come
onto the market. This very skillful trader has moved from being an
aggressive to a cautious player in the Flash market in the last few days.
A further clue may be the amount of Intel's price cuts on Monday. Much
greater than 10% could be a sign of some demand concerns.
Intel will finally release its 0.18-micron Coppermine processor on
Monday. The Coppermine will have two packaging options: an SEC cartridge
like the current Pentium III, and in a BGA package, like the current
Celeron, which allows the chip to be placed directly on the motherboard.
In addition to being a "shrink" of the 0.25-micron Katmai (reducing die
size, cost and speeding up the part), Coppermine will have double the
on-board SRAM cache at 256K megabytes and run at 733MHz.
The low-end of the processor market remained flat last week with the
market decidedly slanted towards the high-end. The average Celeron
discount to list pricing remained flat at 10% as the market continued to
mention low-end cuts on November 7th. Intel is reportedly restricting
shipments of the low-priced, low-profit "Smell-eron" mostly because it
can as there is no AMD, Cyrix, or IDT to deal with, at least in any
volume. AMD's low-end chips also remained relatively flat in the gray
market last week.
DRAM spot pricing continues to trend lower.
Activity in the DRAM spot market remained light last week as prices for
bellwether 64Mbs dipped to $11, down from $13.50 the previous week, with
some quotes out of Taiwan on Friday as low as $8.90. Early in the week,
some traders were hoping Intel's price cuts would boost pricing, but by
the end of the week, the channel was anticipating further weakness to
come. In addition, pricing for 128Mb product fell from $27 to $22.
So what is happening in the DRAM market? In the past several cycles,
contract and spot prices have tended to rise 40-60% above previous lows
and remain there for months to years, allowing PC OEMs to internalize or
quietly pass on the price increases. This cycle has seen spot prices
spike up 5x and contract move up 3x, all in a few months. The major OEMs
can no longer internalize the rapid increases, and in the past few weeks
have begun to take countermeasures to try to drive prices down again.
1) OEMs have begun to de-configure standard systems from 128MB to 64MB,
which theoretically (though not actually) cuts demand in half. Not only
Dell is doing this, but Compaq and Hewlett have begun to cut back on the
amount of standard memory, passing the increased cost on to consumers who
want bigger allocations.
2) Blowing out excess inventories into the spot market. In the past few
weeks, OEMs, who may have ordered more DRAM than they could digest during
the Taiwanese shortage, have been more active pushing product out the
back door and into the spot market than at any time in this upturn.
3) Yields on recent shrinks have improved output, increasing supply
during this usually busy Christmas season. Hyundai, in particular, has
improved output and Micron and Samsung are headed in the same direction.
4) Brokers are anticipating the seasonal top in the market a few weeks
out, and given uncertainties over Y2K, etc., are not willing to hold
inventory.
The DRAM market volatility has made it extremely difficult for all
participants-investors, manufacturers, and consumers of DRAM-to read
true market conditions. The stability the market seeks is probably at
lower prices. Micron (MU, 3S), Samsung, and Infineon all make good money
at any price over $7-8, with average costs rapidly dropping to
$4.50-$5.00. Indeed, that is the range given by several vendors and
buyers as "fair market value" (whatever that might mean). It has been
our experience that once spot market prices cross contract prices on the
downside, as they have begun to do, they drag contract prices down for
some period of time.
Micron is a substantially larger and more important company in this
cycle, now holding about 20% market share (twice what it held at the peak
last cycle). Indeed, it is the undisputed process leader with volume
shipments of 0.18 micron process now underway. Even so, we remain
increasingly wary of the fundamentals in the DRAM market. As a result,
last week we downgraded the stock from Buy to Neutral last week. |
