HP Comments Fuel a Memory Stock Rally and Give Credibility to iPhone 7 Rumors

Passing remarks made by HP Inc.  (HPQ) during its Wednesday afternoon earnings call have given Micron (MU)  and Western Digital's (WDC) beaten-up shares a lift. They also appear to lend credence to rumors about the storage and memory capacities of certain iPhone 7 models.

While discussing the fairly mundane subject of HP's near-term cash flow assumptions, CFO Cathie Lesjak mentioned that HP's PC unit began seeing "some issues with component supply availability" during the July quarter, due to the shifting of capacity by suppliers to "other product categories." She added HP plans to "opportunistically leverage" its balance sheet during the October quarter to guarantee component supplies are adequate.

Citi analyst Jim Suva later pressed HP for more details on the issue, and CEO Dion Weisler responded by stating HP is seeing shortages related to LCDs, DRAM and flash memory. He added the shortages aren't a result of PC industry demand, but due to demand from other markets. As examples, Weisler cited "glass going into televisions" and (notably) "memory going into phones that are likely to double density."

Micron, which got 60% of its revenue from DRAM during the May quarter and most of the rest from NAND flash memory, is up nearly 6% from Wednesday's close. Western Digital, which earlier this year swallowed NAND giant SanDisk, is up about 3% over the last two trading days.

Weisler's remarks come ahead of next month's expected iPhone 7 launches, and closely follow Samsung's Galaxy Note 7 launch. They also follow a number of reports indicating Apple (AAPL)  plans to double the storage capacity of the least expensive iPhone 7 and 7-plus models to 32GB, thus addressing a common complaint of would-be iPhone buyers. In addition, there have been reports suggesting more costly iPhone models will see their capacities doubled to 128GB and 256GB.

Also: KGI Securities has reported the iPhone 7-plus will feature 3GB of RAM, or 50% more than what's found in the iPhone 6S and 6S-plus. The regular iPhone 7 is expected to still only have 2GB.

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Any shortages caused by big iPhone-related orders might be very temporary, letting up after iPhone 7 production inevitably slows from high initial levels. But considering how weak sentiment has been for DRAM and NAND makers, markets are happy to see any sign of an improved supply-demand balance.

Soft PC sales, slowing smartphone growth and intense price declines have weighed heavily on the DRAM industry's sales. The NAND industry has seen stronger volume growth as adoption of solid-state drives (SSDs) gains momentum, but this has been accompanied by major price drops.

Last week, Micron rose after chip equipment giant Applied Materials (AMAT) mentioned on its call that it expects DRAM capital spending to drop "at least" 25% in 2016 after growing rapidly last year, and rise just "a little bit" in 2017, as manufacturers try to get supply in check. At the same time, Applied forecast NAND capital spending will rise 40% this year, up from a prior outlook of 35%, as manufacturers ramp production of low-cost 3D NAND flash. Micron is still down 55% from a December 2014 peak of $36.59.

As always, expectations matter a lot. Expectations have been pretty low for DRAM and NAND makers. Enough so that some casual remarks from a PC maker about near-term business conditions can fuel a rally.

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