- Samsung is the first to break ranks on new DRAM capacity.
- Micron is at a cost disadvantage on DRAM due to die size.
- How to play it from here.
The issue seems to be Samsung Fab line 17 which was built as a logic fab (with capacity of 80,000 wafer starts per month). Fab 17 is now being finished as a DRAM fab, presumably with a much higher wafer output that the original 80KWSPM of logic capacity.
A fab 17 running full tilt could produce 1.5 billion very low-cost 4Gb DRAM chips.
As I've mentioned before, I know that Micron is at a significant disadvantage on DRAM die size and is working feverishly to correct that problem. The solution for Micron is at least a year away. The desperate prayer has been that DRAM pricing would hold until Micron has the required DRAM shrinks in place.
It looks like Samsung will be throwing a monkey wrench into that plan. Samsung is a brutal competitor and the wild card in the memory oligopoly. Just to review; at one time Samsung was not in the memory business. From that zero position, they have grown to become the world's largest supplier of DRAM and NAND memory. They didn't do that by being a shrinking violet - or even playing fair. To Samsung nothing has changed - they are still world's largest memory manufacturer and they want to be larger. They have the advantage of huge captive demand for memory. Oligopoly is just a strange word and concept to Samsung.
Today we are getting some indication of how fragile this oligopoly is and the terrible cost disadvantage that Micron would be in if DRAM prices were to start a decline cycle.
How does Hynix (OTC:HXSCL) and Micron not respond with capacity addition of their own?
I really do believe the memory business has changed forever and that it really is "different this time," but this move by Samsung, in a weakening market, is a molar jarring speed bump for the different-this-time folks.
On the other hand, low DRAM prices are always good for the PC Business.
So, we are where we are. What to do from here? If you are a new buyer of Micron, consider selling. If you have a large gain in the stock, you can write covered calls for partial protection, or spend more money and buy some out of the money puts for protection in event of a serious price collapse.
My personal favorite when caught in a situation like this (large gain in call option position) is to sell the calls and put part of the gains into some new out-of-the-money LEAPS, thus limiting my loss in the event of a collapse while still keeping a toe…or a leg in the game. Then I would take my wife out to a nice dinner on some of the realized gains.
Look around for the next play, after all the Micron story is getting a little long in the tooth.
Gilead Sciences (NASDAQ:GILD) is looking good to me. I'm buying Jan 2016 135 LEAPS. Of course there always is the boring Intel (NASDAQ:INTC), you could buy Jan 2016 45 LEAPs and just live your life for the next 18 months...and then cash in and buy the Jan 2017 Intel LEAPs.
As the Blackjack dealer says: Good Luck.
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