I sure hope my house doesn't catch on fire.
LOL
BUSINESS WEEK ONLINE
October 27, 1999
STREET WISE by Sam Jaffe
If the Memory-Chip Cycle Is Heading Up, So Is Micron
America's top DRAM maker looks poised to cash in on a commodity that's seeing demand outrun supply
How much dynamic random-access memory (DRAM) does your computer need? If you can answer that question, then you know which direction Micron Technologies' (MU) stock will be heading.
According to Dell (DELL), the world's No. 2 maker of personal computers (but tops in the U.S.), you can easily get by with 32 megabytes of DRAM. According to Compaq (CPQ), the world's largest PC manufacturer (but now No. 2 in the U.S.), nothing less than 64 bits will do.
The answer is important to Micron because it is this country's largest manufacturer of DRAM chips. Wall Street has in the past reviled the stock because Micron's products are pure commodities: Any DRAM chip from any manufacturer will do just as well as a DRAM chip from any other manufacturer. That means the only variable between DRAMs is price, which tends to cause booms and busts for DRAM makers. And Wall Street always prefers steady growth in profits over booms and busts.
FALLING PRICES. Before you condemn Micron and other DRAM makers as the high-tech equivalent of grain depots, however, take a closer look at the DRAM pricing cycle. That's what Wall Street is doing. The first thing you need to know about DRAMs is that over the long term, prices always fall. There may be short-term price spikes, such as the 25% increase that occurred in September after the earthquake in Taiwan, where a lot of DRAM chips are made. But inevitably, after such disruptions, the price heads south.
The key thing to watch is any change in the rate of descent. For the past four years, DRAMs have nosedived: In 1996, spot prices dropped 45%; in 1997 they fell an additional 75%; 1998 saw another drop of 45%. Through the first nine months of 1999, prices have fallen a further 39%. This means a DRAM is worth less than 10% of what it was four years ago. Historically, DRAM prices have tended to plummet for about four years, then fall more slowly for the next four years. "It tends to be a four-year cycle," says Ragen MacKenzie analyst Daniel Nelson. So the good news is that "we're clearly at the end of four really bad years."
Dropping prices don't reflect slackening demand for DRAMs. Every year, says Nelson, you can count on a 70% to 100% increase in demand, thanks to red-hot growth in demand for PCs. The supply side of the equation has been the villain in pricing. In the mid-1990s, Japanese, Korean, and Taiwanese companies poured money into building DRAM factories. As a result, manufacturing capacity swelled far beyond what the PC industry needed. The desperate need for foreign cash during the Asian financial crisis of 1997 and 1998 forced some of those companies to continue production even though the chips were selling for less and less.
RISING DEMAND. As Asia has pulled out of its economic morass, though, cooler heads have prevailed, and DRAM factories are finally starting to slow production. At the same time, consolidation has hit Asia's semiconductor industry, shuttering some plants. Now, 75% of DRAMs are made by four companies: Micron, Samsung, Hyundai, and NEC. Five years ago, there were dozens of significant manufacturers.
Back in the U.S., meanwhile, there's no sign that demand is slowing. Moreover, the PC industry is about to change the type of DRAM it uses. Most notably, PCs will soon be using a new type of optimized DRAM called an RDRAM, or Rambus DRAM, named after the company that designed it, Rambus Technologies (RMBS). The RDRAM functions at speeds more than double regular DRAM rates. Also, most PCs will soon be using chips whose circuitry will be 0.18 microns wide, vs. the current 0.25 microns.
That will increase the speed and efficiency of DRAMs. But since new factories and equipment are needed to make both the RDRAM and 0.18 micron chips, capacity for making both should be limited, at least for 2000. "Thanks to consolidation and the new standards, we're assured of price stability for the next year or two," says Gregory Mischou, an analyst with Warburg Dillon Read who rates Micron a buy. Consequently, "we expect Micron to reach $100 by the end of the year."
Whether he's right will depend some on the answer to our first question: How much memory does a computer need? When DRAM prices jumped in September, Dell responded by reducing the DRAM component in its sub-$1,000 line of computers from 64 megs to 32 megs. The company argued that most users don't need more than 32 megs, and that by making the reduction it could avoid raising prices. When Dell announced its move on Oct. 19, Micron's stock dropped nearly 8%. It was a peculiar sympathy move, since Dell gets nearly all of its DRAMs from Samsung. The market apparently assumed that the rest of the PC industry would follow Dell's lead.
MORE UPSIDE? The market looked more kindly on an Oct. 26 announcement by Compaq of a multiyear contract with Micron that will make the Idaho company Compaq's majority supplier of DRAMs. Although the deal can't be translated into dollars at the moment, thanks to the mercurial nature of DRAM prices, it's sure to be worth "many billions of dollars," according to a Compaq spokesperson. As important, Compaq declared that it will continue to offer at least 64 megs of memory in most of its models. In response to the news, Micron's stock jumped 2% before closing at $62.13.
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