It had to happen sometime.

The facts are catching up with memory maker

Micron Technology

(MU) - Get Report


For weeks now, prices of dynamic random access memory, or DRAM, have been deteriorating and inventories have been growing. And now it looks like Wall Street is catching onto what this could mean for Micron's results.

And that's not good for the stock, which has come under pressure again this week despite having eked out gains of about 7% this year, just a notch under the

Philadelphia Semiconductor Sector Index

. It hasn't been any easy road. As demand dried up for personal computers last fall, so too did demand for DRAM, the memory used in PCs. Micron's stock fell from its 52-week high of $96.56 in July and never recovered, trading in the $30s and $40s since the end of September.

But then talk of stronger pricing began circulating. And after a run-up in March, the stock dipped in early April only to recover again as memory prices stabilized and investors began believing that the second half would bring a recovery to the personal computer business. It hasn't turned out that way. This month the stock began to languish and this week Micron fell even lower as its revenue possibilities grew slimmer.

The standard 128-megabit DRAM that sold for more than $10 last fall is now available on the spot market for less than $3. Instead of making money with every memory unit it produces, companies like Micron are actually on the brink of losing money. And with inventories starting to grow again, and the chances of a second-half recovery seemingly slimmer, the possibility of Micron pulling out the earnings that Wall Street has been counting on is shrinking.

Drifting Down

Expectations for Micron's earnings have been drifting down during the past seven weeks, with analysts now expecting the company to lose 7 cents a share in its third fiscal quarter ending this month, according to

Thomson Financial/First Call

. That's down from the 1-cent a share loss analysts expected at the beginning of the quarter. Estimates for fiscal 2001, which ends in August, also are sliding lower. The latest consensus estimate is 59 cents a share, down from 63 cents a share previously.

One analyst who cut fiscal-year expectations is

Lehman Brothers

analyst Dan Niles, who on Wednesday said that he expected earnings per share for fiscal 2001 to fall to 25 cents a share from the 50 cents a share he had expected. For fiscal 2002, Niles trimmed his expectation to $1.00 a share from $1.60. Just a week ago,

Merrill Lynch

lowered its expectations for the quarter to a loss of 2 cents a share from earnings of 26 cents a share. For the year, it expects earnings of 73 cents, not the $1.38 it once looked for. (Neither Lehman nor Merrill has done underwriting for Micron.)

Lehman's move drove Micron shares down about 3% Wednesday. They're off 8.5% for the month.

Micron declined to comment on the lowered expectations.

It seems pretty obvious now that Wall Street got ahead of itself earlier this year when DRAM pricing stabilized and companies began talking about the normalized personal computer market. The PC world hasn't exactly turned out that way. In fact, demand for computers hasn't picked up -- just take a look at



latest move -- and DRAM makers have seen their inventories start to balloon again.

Rising Inventories

Inventory levels that were at two to four weeks in April are now at about six weeks, according to Richard Gordon, an analyst at

Gartner Dataquest

. At the same time, DRAM makers are charging less for what they can sell. With spot prices below $3 and contract prices hovering around $3.50, DRAM makers are approaching a serious problem. It costs about $3.50 to make a DRAM unit.

"If the market price is below cost, the more you ship, the more you lose," Gordon explained. Indeed, Merrill's Joe Osha said Tuesday in a research note that some Micron contracts are settling for under $3. A Micron spokesman said that contract prices are in the high $3 range.

The link between DRAM and the PC market is clear. About 75% of DRAM is used in PC applications, according to Dataquest, which expects total DRAM revenue to fall about 35% to $20 billion in 2001. Another 20% goes into servers, with the balance used in a variety of applications from automotive to communications.

All eyes are on the PC recovery now as Wall Street looks to see if the second-half recovery, spurred by back-to-school buying, will occur. If it does, that's good news for DRAM. But if it doesn't, or if it's slow in coming, that could be painful.

Lehman's Niles said in his note that demand won't bottom until summer and then will only slowly recover without a big boost. Gordon points out that without a recovery this fall, it could be another year before DRAM recovers.

That's not likely to get Micron's stock moving up anytime soon.