BOA On Semi Equipment Stocks: DRAM Price Pop Mere Inventory Build

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Includes: AMAT, LRCX, NVLS-OLD
by: Notable Calls

Banc of America's Semi team notes a sharp rise in DRAM pricing in the last week fueled yesterday's rally in semi-equipment stocks. But the improvement in DRAM prices is likely driven by the accumulation of inventory at suppliers rather than a resolution to the oversupply problem. Days sales of DRAM inventory will likely increase across the board when suppliers start to report their June quarter earnings.

June and July are the two weakest months in the year for memory demand. So why are prices increasing if demand is seasonally weak? In the past, DRAM suppliers use this time of year to build inventory and push prices higher. Demand picks up sharply in August. Suppliers want to start the seasonally strong period (August to October) with the best possible backdrop to pricing.

So price increases in June and July have little to do with supply/demand. They think the DRAM industry is in an oversupply situation. Whether or not second half seasonal demand can soak up the excess supply is the critical issue. Recent favorable monthly PC demand is a better argument to support a soft landing in the memory cap-ex cycle than DRAM prices.

Notablecalls: Both AMAT and LRCX blew through my stops yesterday. Yet it looks like the bounce in DRAM pricing has nothing to do with end demand. Also note that Piper Jaffray is out downgrading NSM, ADI and LLTC (analog space) this morning, saying recent industry checks indicate a broad weakening of the semiconductor recovery cycle. Not making any calls here, though.