| The oversupply and the resulting drop in average selling prices have become so bad that some analysts are warning Wall Street that, despite the steady demand for PCs and consumer technology products - particularly wireless handsets - they should tone down expectations for the coming holiday shopping season.
"Demand looks stable for the third quarter, but these guys have overbuilt like farmers planting too many soybeans in a bumper year," analyst Roger Kay of Endpoint Technologies Associates said. "And the fourth quarter could be pretty quiet. So upside demand to relieve the oversupply is unlikely. Speculators only accentuate trends already in the offing."
Analyst Glen Yeung of Citigroup also told clients in a research note Wednesday that supply "remains the main concern," with more output coming from manufacturers who have converted their fabrication facilities to NAND flash memory chips from DRAM memory.
"DRAM speculators (module houses) are also dumping inventories ahead of the holiday season, which is expected to further contribute to contract pricing weakness in September," Yeung warned.
Personal computers are among the top users for DRAM products, while NAND chips are commonly used in such devices as cell phones and digital cameras.
Nicholas Aberle of Caris & Co. urged investors to avoid companies that rely heavily on a robust holiday season to drive earnings in the second half of the year.
"We expect a muted seasonal uptick from Christmas to moderately improve end unit demand for memory in the second half of 2008," he told clients in a research note on Wednesday. "However, we believe the over-supply of DRAM and NAND will keep blended memory average selling prices depressed, resulting in modest revenue growth and gross margin compression for the memory market."
Aberle recommended that investors to sell shares of SanDisk Corp. "given our expectations for over-supply to result in greater than previously expected inventory write downs, lower product gross margin, and revenue growth."
While he described Micron Technology is "the best name in the memory space given its leading cost structure in both DRAM and NAND," he recommend that investors "remain on the sidelines until we see evidence of further reductions in CapEx, consolidation, and a better ASP and memory supply/demand environment to get more positive on the stock."