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Technology Stocks : Semi-Equips - Buy when BLOOD is running in the streets! -- Ignore unavailable to you. Want to Upgrade?

To: Ian@SI who wrote (3582)	11/26/1997 7:01:00 PM
From: John Dally	Read Replies (2) \| Respond to of 10921

Bob & Ian, The spot price at the Achilles site indicates $3.10 for the 4Mx4-60ns SOJ FPM. The Smith Market Watch site shows the price was $6.20 on July 25th, indicating a 50% price reduction in 4 months. This seems to be a very rapid price decline to me. Industries with high fixed costs, low marginal costs, and overcapacity tend to drive sales prices down to the marginal cost of production, forcing everyone to produce at a loss (when you include the amortization of the capital equipment) until the weak players leave the business. I assume that's what's happening with DRAMs right now. (If anyone knows the marginal and fully burdened cost of producing such a chip, please post it.) The other part of the story is how will Korean manufacturers finance new equipment purchases? Korean companies are highly leveraged (350%-400% debt/equity) and will be spending their cash flow paying back $ interest and debt. Korean (and Japanese) financial disclosure standards are very lax. Bankers can't be certain of the financial health of many of these companies and IMO are unlikely to risk lending new money for equipment purchases given the excess production capacity, currency and stock market turmoil. Lastly, my guess is that much of Asia is headed for recession. Given the financial crises in SEA, Korea, and Japan, it's hard to imagine that there will be much economic growth during the next year. I assume this will affect technology investment and end-user demand. IMO, it all adds up to a pretty rough year for semi equipment manufacturers. Best regards, John.

To: Ian@SI who wrote (3582)	11/27/1997 4:20:00 PM
From: John Dally	Read Replies (1) \| Respond to of 10921

Bob and Ian, Here's how I view the sector from the top down: The SIA estimates for DRAM sales are $41 billion for 1995 and $25 billion for 1996, a decrease of 39%. (This is from an October 30 Reuters report.) This drop occurred despite the fact that Windows 95 probably caused DRAM per PC to increase dramatically (double?) in 1996, due to W95 OS requirements. (The W95 cycle started in late 1995.) In addition, much of the installed base which upgraded to W95/Pentium probably ended up doubling their DRAM as well. (In my case, since the bus architecture of the Pentium was different, I had to toss out my original 16 MB to buy all new 32 MB.) So, despite the W95/Pentium induced boost to DRAM unit volume, total $ sales decreased by 39% from 1995 to 1996. Now, the price of 16 Mb DRAM just dropped 50% in 4 months! Yes, unit volume is increasing, but are unit volume increases going to overcome price declines to allow total DRAM $ sales to increase in 1998? As for microprocessors, I read that in February 9% of PCs sold were sub-$1000 PCs. The latest figure for August (or September) was 40%. To me this implies that a larger and larger segment of the MPC market is being commoditized. More customers are choosing to slide down the P200 cost curve, rather than pay for the "latest and greatest" high margin MPC from Intel. So, IMO MPC $ sales will increase at a lower rate going forward. In any case, for the first time in a while there is margin pressure on a major segment of Intel's market (which is why they missed their last 2 quarters). So, I don't see semi manufacturer revenue increasing as it did in the past. Last point, re semi equipment manufacturers. According to this analyst's estimates, Korea accounts for 22% of all semi equipment purchases: Message 2605523 I disagree with the analyst's conclusions. The question that needs to be answered, is who is going to lend money to a business with (1)murky accounting standards (2)a pre-currency and pre-stock market crash debt to equity ratio of 350%-400%, and (3) which produces a commodity product which dropped 40% in value during the last 4 months? Just my opinions . . . Best Regards, John.