How Low Will DRAM Prices Go?

Things continue to get uglier in the DRAM market.

“We recently completed a trip through Taiwan and Japan to take the pulse of the memory sector,” Pacific Crest’s Kevin Vassily wrote in a note this morning. “We are not doctors, but we found it difficult to detect a pulse in the DRAM sector, and noted an anxiety-induced elevated heart rate in the NAND sector. The culprit, we surmise, is excess supply.”

Vassily says conditions are going “from bad to worse.” He notes that when he left for the trip, DRAM spot prices were already down 20% from the prior month; by the time he came back, prices had dropped another 10%. “Producers seem shell-shocked, and for good reason,” he says. “Despite the horrible pricing environment, many people we talked to felt that it would likely get worse, thanks to industry-wide process migration, additional capacity coming on line near term, and the upcoming seasonally weak first half of 2008.”

Vassily Tuesday cut his estimates on Micron Technology (MU); for the fiscal first quarter ended November 1 Vassily now sees revenue of $1.44 billion and a loss of 14 cents a share, down from $1.52 billion and a loss of 11 cents. For the full year, he goes to $5.84 billion and a loss of 37 cents, from $6.18 billion and a loss of 25 cents. And the reason: conditions in the DRAM business continue to deteriorate.

As for NAND memory, Vassily says pricing is stable…for now. But he expects price declines in December. “Opinion was nearly unanimous on the price environment looking forward - weak,” he writes. “Once again, supply coming on line aggressively is the culprit.”

In another note, Caris & Co.’s Daniel Berenbaum pointed out that DRAM spot prices are now well below cash costs are showing no signs of a near-term rebound. Berenbaum says some memory companies are likely to feel pressure to cut costs to keep the doors open, and he says that it would not be surprising to see one or more players exit the market. “It is difficult to see how all the current players survive,” he writes.

Berenbaum says he sees Qimonda (QI) “at risk,” with a high cash burn rate. He thinks the company could copy a recent move by Elpida, which did a sale/leaseback arrangement with GE Capital on its 300mm fab equipment to reduce depreciation and free up cash. Doing that would allow Qimonda to keep operating for “some extended time period,” with the additional effect of “prolonging industry over-supply.” He notes that Qimonda has about 13% market share in DRAM, although he says the total will drop below 10% by year end due to new capacity in Taiwan and Korea.

Qimonda Tuesday is down 44 cents, or 5.7%, to $7.27; Micron is off 32 cents, or 3.6%, to $8.52.