DRAM Memory Vendors Headed For Trouble

Samsung, Hynix, Infineon (IFX), Quimonda (QI) and Micron Technology (MU) are among the biggest producers of dynamic random access memory, known as DRAM, the most common type of memory chips used in PCs.

Shipments up, prices down

Market research firm iSuppli reported that prices for DRAM chips will decline starting in September. This could wipe out the small gains seen by some of these DRAM manufacturers during a brief two month period earlier in the year when the pricing scenario was firmer. iSuppli sees the coming price decline hitting double digits.

Looking at 2007 in its entirety, iSuppli expects that it will be a strong year in terms of bit growth (81%) and unit growth (49%). Nevertheless, inventory overhang and pricing issues have made it difficult thus far for vendors to increase margins. iSuppli projections currently show lower bit growth (only 60%) for 2008 but double digit revenue growth, a significant improvement compared to this years' expected revenue growth of less than 2%.

iSuppli, however, has not been the only metrics firm to weigh in on the DRAM situation. IC Insights is reporting "cautious optimism" for 2H07 in terms of unit sales based on back-to-school and holiday demand as well as requirements for specialty DRAM related to new mobile devices. For now, though, the company is silent on the subject of future pricing.

Diversification helps but...

All the companies mentioned above are diversified beyond DRAMs but if iSupply is right, they will all feel the pain to a certain extent, especially Micron Technology whose name has been synonymous with DRAM for years. Memory products as a whole make up nearly 90% of Micron's sales. Two DRAM products alone, DDR and DDR2, were 45% of the company's total net sales in the third quarter of 2007. This price decline will hit Micron's already slim, single digit gross margin on memory products pretty hard and extend the weakness in the company's stock price.

Samsung is actually the second largest semiconductor manufacturer in the world after Intel. Of Samsung's almost $20B in semiconductor sales last year, over 80% is based on memory devices (Flash and DRAM). Luckily for Samsung, their strength in the growing Flash market will help to offset weakness in DRAM. Likewise, Hynix, who has buried the hatchet and entered into a joint venture with SanDisk (SNDK) will be able to rely on Flash growth to mitigate the problems in DRAM.

All told, this is a confusing picture for the DRAM suppliers with pricing problems appearing to overshadow robust unit growth. And it appears that this is not yet a good time to be buying Micron Technology on weakness.

Disclosure: Author does not own any of the stocks mentioned in this article