Reduced chip outlook sends memory stocks lower

Rambus and Micron Technology led chip stocks lower Monday following a discouraging outlook from the Semiconductor Industry Association, a leading trade group for the semiconductor industry.

Rambus (Nasdaq: RMBS) fell $5.44, or 11 percent, to $43.63 in early afternoon trading while Micron Technology (NYSE: MU) shed $3.07, or 7 percent, to $38.13.

Among other leading chipmakers, Intel (Nasdaq: INTC) slid $1.81 to $33.81; Advanced Micro Devices (NYSE: AMD) shaved off 78 cents to $23.11 and Broadcom (Nasdaq: BRCM) shed $7.38, or 7 percent, to $91.75.

According to the SIA, chips sales in 2001 will fall short of previous estimates of 22 percent growth from last year, when chip sales checked in at $204 billion, up 37 percent from 1999. The trade group is now projecting a 17 percent improvement this year despite slumping PC sales and deteriorating memory-chip prices.

Micron Technology, which missed analysts' estimates in its latest quarter, enjoyed a nice run-up last summer when average selling prices for dynamic RAM (DRAM)\ hit their peak.

Last week, a pair of analysts weighed in on Micron’s prospects heading into what most experts believe will be a rough year for memory-chip vendors.

SG Cowen analyst Rick Billy rates the stock a “buy” but warned that further erosion of average selling prices makes it difficult to maintain an enthusiastic outlook at this point.

“It is clear that 128MB DRAM (over 70 percent of semiconductor revenue) ASPs have been at the low end of the $6 to $7 range we have been expecting,” he wrote in a research report. “All anecdotes we hear suggest that both pricing and demand for DRAM have been consistently awful for the past two months and remain that way now. It seems prudent to assume the very low end of that ASP range rather than the mid-point, as we have been.”

Following the earnings miss, Micron executives guided analysts’ second-quarter and fiscal 2001 estimates lower.

Analysts are now expecting it to earn only 17 cents a share in the second quarter on sales of $1.43 billon, down from a profit 58 cents a share on sales of $1.8 billion in the first quarter.

Despite the lackluster outlook, ABN AMRO analyst David Wu reiterated his “buy” recommendation and 12-month price target of $70 a share, saying “Micron is a safer and more leveraged way to play the PC recovery in the second half of 2001 and 2002 than Intel.”

“We believe inventory that has been built up at major DRAM suppliers is beginning to decline as customers' order rate returns to normal from the sharp reduction in 4Q calendar 2000,” he wrote in a research note. “We believe these are good indications of price stability in the seasonally weak 2Q and a precursor of stronger pricing in the second half.”

Rambus, which topped analysts’ estimates in its fourth quarter, is expected to post a profit of 11 cents a share in its first quarter.

Its shares peaked at $127 in June before tumbling below $38 a share in early January.

In December, the SIA reported worldwide chip sales of $17.9 billion, down 2.1 percent from November, but an expected decline due to the traditional slowing of sales at year’s end. Sales fell 3 percent in the fourth quarter of 2000 from the third quarter.

The report said the Asia Pacific region and Japan saw the sharpest drops in sales in December, falling 3.1 percent and 2.1 percent, respectively. Sales in the Americas fell 0.9 percent.