A Slice of Gloom for Chip Stocks

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"Samsung and Hynix have the ability to quickly shift back and forth between producing NAND and DRAM, and that gives them a better position from which to dictate prices," he says.

Even ahead of the holiday season, when PC sales tend to be seasonally stronger, Micron offered little hope of an improvement in conditions. Michael Sadler, Micron's vice-president of worldwide sales, said during a conference call that the amount of memory sold per PC had flattened during the quarter. "I attribute this primarily to concerns from our customers that memory prices were increasing early in the summer," he said. "As a consequence, [PC manufacturers] took steps to maintain reasonable control of system build and material costs, and used memory content as a lever to achieve that."

Healthy PC Market

Micron has been trying to reduce its reliance upon the DRAM business (BusinessWeek, 5/18/06) for years and in particular has been focusing on building CMOS (complementary metal-oxide semiconductor) image sensors, which are chips used in digital cameras, especially those embedded in wireless phones.

That gives little hope for Micron in the near term, says Robert Burleson of ThinkEquity Partners. "You have to estimate your revisions right ahead of when you might expect a positive seasonal move," he said. "November is when you see all the demand for the holiday sales, and if they're revising downward now, it's hard to know when to look forward and get excited."

Not every analyst is down on chips. JPMorgan (JPM) analyst Chris Danely issued a more positive note on the two chipmakers in a note issued Oct. 1, saying Intel is benefiting in part from a healthy PC market. He raised his Intel profit estimate for the calendar year to $1.27 per share, from $1.25, and estimates that Intel will post revenues of $37.8 billion, an improvement of $200 million over his previous estimate. His price target is $26.37.

Danely also says he expects Intel to gain market share back from AMD in the current quarter, particularly in the high end of the notebook PC market. "Although AMD should gain share in server processors until the second half of 2008, we believe Intel should remain dominant in laptop and desktop microprocessors," Danely wrote.

Recession Worry Ripples

Ultimately, the fortunes of chipmakers and computer makers, including Dell (DELL) and Hewlett-Packard (HPQ), will also ride on the strength of consumer demand heading into the end of the year. "The big question is if consumers show up for the party," says Kumar of CRT. "Otherwise, we'll have a situation with oversupply and price wars, and profit margins will collapse."

PC demand for now appears to be holding steady. Research firm Gartner (IT) says the market is on track to grow by 12.3% by the end of the calendar year, which would put unit sales for the year somewhere in the ballpark of 268 million. Gartner expects PC sales to grow another 11% on top of that in 2008. Still, while unit sales are up, prices on PCs sold have continued to decline.

Doug Freedman, analyst with American Technology Research in San Francisco, isn't worried. "Over the summer Wall Street was telling people to get ready for a recession, and so it should come as no real surprise that everyone is nervous," he says. "Fourth-quarter demand is going to be fine, if not a little better than everyone expects. But there are going to be some winners and losers."

Hesseldahl is a reporter for BusinessWeek.com .