It’s no secret that memory supply/demand forecasts are not positive for the DRAM and NAND players like Micron (MU) and SanDisk (SNDK.) At these levels most analysts are pointing to a bottom in these names and a chance to buy them into an improving supply/demand balance which brings better pricing and improved earnings for these companies.
The problem that I have with this line of reasoning is that everyone knows that the industry balance is fragile and very cyclical. There was a time from 1992 to 1995 where memory (and semiconductors in general) were said to be growing based on secular demand trends. This propelled earnings and the stocks to huge and sustained gains. There may have been a little price fixing around this period but we’ll let that one go.
Since then it just seems to be very easy for companies in increase supply when prices look like they will be slightly attractive. A holder in Micron stock would actually be down today versus the price paid anytime in the last 10 years. So where is the secular growth story here? Lots more bits are shipped every year but at an every declining price per bit.
The commodity run has investors saying that maybe memory will work this way too since we aren’t adding to capacity at these prices. This parallel is problematic in part because one has to discover sources in commodities and the costs and lead times required to deal with the physical and hazardous extraction and processing are fairly high. While a brand new fab is not cheap, there seems to be plenty of capacity for increases in production by starting up or adding new lines.
SanDisk at least has evolved into a memory company with a consumer retail facet and trades at a much higher multiple of sales than a pure commodity producer like Micron. However the same logic about better supply and demand applies here. Even if everyone is right and SanDisk has a big December quarter due to higher revenues and slightly better margins, nobody will think it can be sustained so the multiple stays low and the stock appreciation is limited.
If the commodity producers don’t have strong pricing power then the argument favors the branded device makers like Apple, Research in Motion and even Dell over the component suppliers. If memory is cheap it also helps move units and provides software makers like Microsoft very favorable revenue and margin dynamics that are more sustainable.
We welcome arguments to the contrary but we haven’t owned Micron since the mid-90’s and have been tempted by SanDisk but always scared off by what seems to be the same long-run truth about the memory business.
— Kris Tuttle