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Friday, December 26, 2008

NAND prices tick up

On the back of recent spot market strength and numerous production cuts, NAND contract prices have edged up for the first time in months.

LastUpdate:Dec.24 2008, 16:20 PM (GMT+8) Flash Contract Price (2H Dec.)







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NAND 16Gb 2Gx8 SLC






NAND 8Gb 1024Mx8 SLC






NAND 4Gb 512Mx8 SLC






NAND 16Gb 2Gx8 MLC






NAND 8Gb 1024Mx8 MLC






NAND 4Gb 512Mx8 MLC







As mentioned earlier this week, Sandisk is the only stock that makes much sense buying in the memory space. It generates substantial income from its patent portfolio – the stock's market capitalization is roughly 5* its trailing royalty stream. Admittedly, that royalty stream is in some degree of jeopardy in that Samsung is expected to stick Sandisk with lower royalty rates next year. The retail market for cards has been very weak. I think NAND will remain firmer than other aspects of memory as there is stacking opportunity there – lower prices means larger capacity moves into the market at more affordable prices relative to hard drives. In DRAM, PCs cap out at roughly 4 gigs. Theoretically the capacity opportunity in NAND is much larger as flash can take share from hard drives due to its smaller form factor. Non-mechanical storage has a durability benefit in portable applications as it has no moving parts.

It's encouraging to see prices pick up. I don't have a great sense of NAND card inventory at retail – it may be just a blip. I'm long some Sandisk.

Tuesday, December 23, 2008

Hynix gets deathbed extension; Powerchip reaches for lifeline

Hynix got banks to rollover some financing due in 2009 and got a cash infusion from Korea. Powerchip is asking Taiwan to bail them out, too. DRAM contract prices for 2H December collapsed further:







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DDR2 1Gb 128Mx8 667MHz






DDR2 512Mb 64Mx8 667MHz








Spot prices have started to back off as volumes are dry heading into the holidays.

Though output cuts from Hynix, Powerchip, Micron and the rest of the motley memory crew will help to alleviate pressure on prices, the really meaningful shutdowns don't happen when insolvent players are kept alive through government intervention. It stifles recovery and ultimately hurts all competitors. Hopefully Hynix follows through on its proposed output cuts after receiving their refinancing… but you never know what happens when bad businesses get new fistfuls of cash.


Google (GOOG) replaces cash bonus with booby prizes

Gizmodo reports Google has replaced the $20,000 holiday cash bonus with unlocked T-Mobile Android phones. Employees are not permitted to resell the phones. The memo explaining the gift (bet they didn't have to include memos with the cash!) talks about how they need to conserve money in the present environment.

Google has really been clamping down on spending. I've noted a handful of items that highlight their frugal attitude. They act like they're having significant revenue visibility issues. Margins will clearly improve assuming revenues haven't already collapsed. Market share data doesn't suggest a significant change in Google's competitive positioning. Keyword pricing, though, has to be under a decent amount of pressure as every asset in the known world has come down significantly. Cost per click has been dropping for many of the e-commerce vendors, which would suggest lower net revenue for a company like Google that effectively sells clicks.

With all the cost controls Google seems to have in place, one would think they would have a decent upside surprise to operating margins. It's the top line that seems vulnerable.

Monday, December 22, 2008

Sure, what the hell. Let's bailout DRAM too.

I understand bailing out the banks. I get bailing out the autos in spirit. I do not understand bailing out DRAM companies.

In recent weeks prices of commodity memory parts have collapsed due to widespread cancellations rippling through the PC supply chain. Memory manufacturers were already very weakened heading into the inventory destocking. Many of the Asian manufacturers like Hynix, Promos, Powerchip have been losing money for over a year now due to industry overcapacity. Qimonda of Germany is virtually insolvent.

As I've been talking about forever, semiconductor capital equipment companies had a larger percentage of orders and revenue coming from memory manufacturers than at any point in their history. It represented over 50% of Applied Materials book and they are one of the more diverse companies in the space. At companies like Lam Research and Mattson, memory was 80-100% of orders at the peak.

It is only in the last 9 months that any meaningful capacity cutbacks have been implemented. For the most part, these cuts have come in the form of capital expenditure reductions. Existing capacity has begun to see some real output cuts in the last quarter or so with Toshiba, Samsung, Hynix and assorted others reducing output to try to conserve cash. For the last several years, memory manufacturers have tried to produce as much commodity memory as possible in an effort to improve gross margins -- but gross margins have been negative throughout the industry in the latest leg of the downturn. There's no way to spend through that.

South Korea has been actively discussing further supporting ailing and failing Hynix. Taiwan is exploring ways to financially support their domestic DRAM business and is presently trying very hard to negotiate a bailout package. Qimonda managed to negotiate with the state of Saxony in Germany to pull down a 325 mil euro loan and an option to tap future federal aid.

Following announcements by Toshiba of a two week furlough of production and another 30% capacity cut from Hynix, DRAM and NAND prices have risen significantly. As the supply chain has been awash in parts for the last several months, the moves are very encouraging.

The strength in DRAM prices has begun to drag NAND prices higher -- particularly MLC parts. I prefer NAND plays to DRAM plays as I think falling NAND prices will boost solid state drive adoption -- and that's a new market for NAND. DRAM just doesn't get a lot better without some breakthrough application that eats up memory and I don't see it. NAND has a massive and virtually untapped opportunity in SSD and each SSD drive uses up multiple parts relative to their current end markets of mp3 players, digital cameras and cell phones.

The structural industry problems in DRAM remain. Too much capacity is not typically solved by more cash to burn. Capacity cutbacks are a reason to be bullish. Government bailouts are going to keep unprofitable businesses running, though, and that's not good for anyone.

PCs rarely require more than 4 gb of memory so there's a ceiling of sorts there. Low cost netbooks are the fastest growing portion of PC growth right now and they are typically configured with 1 gb of memory and cap out at 2 gb. There are not many new markets being addressed for the parts.

So I won't be chasing Qimonda (QI) or Micron (MU), though I suspect Micron is actively negotiating in Taiwan to cut themselves a good deal.

Sandisk (SNDK) owns all the NAND intellectual property and quite a bit of the royalty stream -- I suspect when Samsung ultimately cuts themselves a better royalty arrangement it will be the last shoe to drop for the stock. The quarter isn't good. The outlook won't be good. The stock trades for 4-5* the royalty stream, though, and that makes it tough to be negative on the stock here. The real question is going to be on the balance sheet -- what does it look like as they keep backpedaling out of the Toshiba joint ventures. Time will tell.

STEC recently lowered guidance due to weakness on the DRAM side of their business. Allegedly the NAND drive side remained healthy... at least relatively healthy. It's an interesting spec at $4.

I can't get bullish on semicap plays yet though I suspect we're looking at the worst of the order patterns and the rate of deceleration is at it's peak. I don't see why order patterns would improve much near-term. I could see them stabilize, though, and maybe that will bring people into the stocks to bet on a recovery. My suspicion is we drag along the bottom for a while but massive government interventions could provide short-term capital and keep orders from dropping further... which would seem wildly bullish comparative to the last several quarters of trend.

I am long a little Sandisk. I hold no positions in any of the other stocks mentioned.

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