March 15, 2001 1:05 PM PST

Have memory prices hit bottom?

The precipitous decline in memory prices appears to have skidded to a halt, leading some analysts to believe that some of the worst effects of the slowdown in the PC market may be over.

Memory prices have remained relatively stable for the past few weeks, said Eric Ross, an analyst with Thomas Weisel Partners. Inventories have also dropped. PC makers, memory manufacturers and distributors combined were sitting on approximately 20 weeks of inventory at the beginning of the year, he said. That figure is now down to around 10 weeks.

Although Ross and other analysts are extremely wary about the global economic situation and computer demand, the numbers indicate the PC market is at least stabilizing. The inventory glut is being digested, clearing the way for the sale of newer products. That's good news for companies like Micron Technologies and even the PC companies.

"I can't say that (memory prices) have hit the bottom today, but they are very close to the bottom," he said. "The PC (manufacturers) are starting to go back to the DRAM guys and place orders."

In a note titled "Light at the End of the Tunnel" issued Thursday, Merrill Lynch analyst Joe Osha wrote that commercial activity in the memory world remains thin. However, "It is important to note that (memory pricing) has not worsened," he wrote.

"While we take caution in calling a turnaround in this early stage, we expect the DRAM market to remain stable and note that supply conditions should only improve going forward," he added. Osha put memory inventories in the six- to 10-week range.

The remarkable aspect of memory prices right now is that they aren't changing. The average spot price, or daily price in memory exchanges, for 64-megabit SDRAM--one of the most common types of memory used in PCs--was $2.25 on Thursday, roughly the same price as the day before, according to Ross.

Spot prices for 128-megabit SDRAM, meanwhile, rose 3.1 percent from Wednesday, to $4.38. Contract prices, or the prices that large PC makers pay, are tracking the same trend.

In the recent past, the picture was less placid. In the first week of October, 64-megabit chips sold for $7.50. In December, the price was down to $3.80, while prices overall were dropping by about 5 percent a week. In February, the price dropped to $3, still higher than today's price.

Stabilization is the result of the inventory evaporation. Excess supplies in late 2000 lead to massive discounts. The problem was compounded in February when memory makers dumped inventories before the end of the Japanese fiscal year, said Ross. Memory companies typically try to spruce up their books by clearing out inventory. Micron, like the Asian manufacturers, also ends its fiscal year in February.

Not only are memory inventories drying up, PC inventories are shrinking as well, he said. It is a similar sentiment cautiously shared by some computer executives.

"We've seen some pickup in notebooks," Webb McKinney, vice president of Hewlett-Packard's personal computing organization, said last week in an interview.

Nonetheless, the outlook remains foggy. Demand will depend on improvement in the economies of Europe and other regions. Even if economic erosion halts, growth will remain limited. Everyone is also more skeptical of forecasts.

"We didn't do a very good job of predicting the slowdown," McKinney said. "The principal driver of the slowdown is the economy. It's not that people woke up one morning and decided they didn't want PCs."

Although prices have stabilized, it is probably still too early to bring out champagne. Hyundai appears to still be selling its memory below costs. Sixty-four-megabit chips cost Hyundai about $4 apiece to make. The company has been selling them for $2 to $2.50.

Micron, however, is in a better position because of lower manufacturing costs and a diverse product line.

"Pricing stability should mean improving share price performance," Osha wrote about Micron. The stock remains a "buy" at Merrill Lynch.

 

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