For the second straight day, an analyst's bearish call is shaking down the volatile semiconductor market.
slid 9.7% Wednesday morning after
Donaldson Lufkin & Jenrette
analyst Boris Petersik downgraded the stock to underperform from buy and cut his 12-month price target to $50 from $122, citing pending price erosion in the market for DRAM. The rest of the chip sector was sagging in sympathy, with the
Philadelphia Stock Exchange Semiconductor Index
Petersik based the call on fears of "a much-earlier-than-anticipated fall in DRAM spot prices and what we expect to be weaker contract pricing starting in the second half of September."
X Marks the Spot
Prices in the spot DRAM market, in which memory chips are sold for immediate delivery, rose smartly this spring before losing traction last month. Spot prices of 64-megabit DRAM (the industry benchmark) have lately been hovering between $7.50 and $8. Contract prices -- which major customers of companies like Micron pay in advance for DRAM -- have thus far been sitting between $8.25 and $8.75.
"The spot market has been mixed, to be conservative," says Mark Giudici, an analyst who tracks component prices for
. "In some cases it's down, in others it's flat. It's giving mixed signals. By now, with the demand situation so strong, you'd expect spot prices to meet and go above contract prices. But that's not happening."
For much of 2000, most industry analysts have been warning of a looming DRAM shortage, on the thesis that suppliers would be unable to meet market demand fully sometime late in the year. But with spot prices continuing to stay below contract prices, some, like Petersik, are beginning to question whether that demand will materialize.
Expand and Contract
"Although we have observed spot prices that traded below the contract rate for the past five weeks," Petersik wrote, "we discounted the weakness as result of weak low-end PC demand in Europe. It now appears that major DRAM users are starting to draw down their inventories and possibly also releasing inventories into the spot market."
Some observers have theorized that companies expecting a DRAM shortage may have artificially pumped up prices earlier this year through hoarding. If that's the case, spot prices could erode further as those companies unload inventories.
The debate over the semiconductor supply/demand dynamic isn't limited to
commodities like DRAM. On Tuesday,
U.S. Bancorp Piper Jaffray
analyst Ashok Kumar
on the grounds that weak demand would slow growth at the microprocessor manufacturer, pushing the chip juggernaut's stock down some 5%.
Billy the Kid
Petersik's call comes one day after
analyst Rick Billy started coverage of Micron with a buy and a price target of $125. He says the weakness in the spot market kept him from issuing SG Cowen's highest rating, a strong buy. But he still expects the DRAM cycle to last another 18 months, and notes that seasonally, business should be
popping up for Micron, even if DRAM prices remain flat.
"You don't need prices to go up," he says. "If they stay where they are now, Micron's
average selling prices will be up 10% to 15% sequentially in the November quarter." (SG Cowen has no underwriting relationship with Micron.)
Dataquest's Giudici, like most analysts, remains unconvinced that the weakness in the spot market signifies anything catastrophic. "Overall, the supply/demand dynamic is strong," he says. "It's like the tail wagging the dog. It's only 5% to 10% of the DRAM market, but it gets all the attention."
It certainly is today.