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Memory chip prices inching out of slump

Micron Technology's earnings upside yesterday--the first report of a profit for the computer memory maker in over a year--may be evidence of a turnaround in the industry.

Micron Technology's earnings upside yesterday--the first report of a profit for the computer memory maker in over a year--is evidence of a turnaround in the memory chip industry, according to some. Or is it?

Memory prices have been on the increase for three quarters in a row, according to analysts, showing that the industry's efforts to stabilize the supply of DRAM (dynamic random-access memory) chips, combined with solid demand for PCs, are finally paying off.

Yesterday, Micron reported profits of $34 million, its first since its first fiscal quarter of 1998, partly due to the strength of memory prices. This is a positive sign, as memory manufacturers have been facing losses or low earnings since 1996.

"After three years, its about time for those guys to see something go their way," said Sherry Garber, senior vice president of Semico Research, who added that the industrywide cutback in plant investments and production stoppages helped cut down on the oversupply condition that has plagued the industry.

Why care about memory prices? It can be a key indicator for trends in the PC market. Stable prices mean profits for manufacturers and investors in memory companies. Substantial improvements in demand can then support demand for semiconductor equipment. On the other hand, the flood of cheap memory over the past two years has been a factor in the drastic cuts in PC prices. Stable or rising memory prices could slow the discounting curve.

However, questions still linger about whether Micron's quarterly results were an anomaly in a continuing downward slide for the memory industry.

Despite price stabilization, others say that prices for 64-megabit DRAM, which now constitutes the bulk of the market, started to decline again in March. "The key item to watch is pricing, and pricing is weak right now," said financial analyst Claude Hazan of C.E. Unterberg Towbin.

The public's unabated thirst for cheap PCs also continues to present a problem. "Demand for memory is not as strong, because high-performance microprocessors aren't selling well," he added, echoing widespread sentiment among investors.

Micron Technology shares, in fact, slipped today to $49.375 in afternoon trading, a decline of 5.05 percent.

Others, however, aren't attributing much significance to recent price declines. The market naturally experiences price declines, said Marc Giudici, director and principal semiconductor pricing analyst at Dataquest, as more companies enter a market and as production technology improves efficiency.

Giudici said contract pricing for memory is around $9 to $9.75, depending on product type. Memory pricing is expected to be at around the low to mid $8 range at the end of the year, he predicted.

"This is price erosion, as opposed to a free fall," the likes of which resulted in below cost pricing up until mid-1998, Giudici said. "Pricing is more rational now--most [manufacturers] are eking out some sort of margin," he noted, adding that PC demand looks to remain strong--a situation that bodes well for memory makers.

"Micron's stock is trading on yesterday's news. Structurally, there is not much indication that DRAM pricing will fall apart," said Nimal Vallipuram, an analyst with Everen Securities, who rates Micron a "buy."

"We think PC demand is fine. We're hearing from sources that the corporate market is coming back strong in March," he stated. Strong PC demand should translate into 20 percent "bit growth," or the total number of computing units that are made, in the coming quarter for Micron, he forecasted.

Bloomberg contributed to this report.