DELL Dell Inc. (MM)

While the world spins, technology spins even faster. This makes the sector all important for every business and industry. Considering its significance, we hardly see a technologically backward company as thriving in this competitive world.

But since the 2009 recession, the sector has seen a setback, in particular due to the weak PC demand. This has pushed not only the PC-makers such as Dell Inc. (DELL) and Hewlett-Packard Co. (HPQ) but also the component manufacturers to a zone of long-term uncertainty.

One of the prime components of PC is Dynamic Random Access Memory (DRAM) chip, which acts as the primary memory of the central processing unit.

Suppliers of DRAM chips are facing a bleak future, which according to research firm IHS iSuppli is due to the rising debt crisis and poor PC sales as consumers migrate to the more trendy smartphones and tablets. This has led to excess inventory in the distribution channels leading to an oversupply position, which has ultimately pushed prices down.

The major players in this industry are Micron Technology Inc. (MU), Samsung Electronics, Hynix Semiconductors, Elpida and Nanya Technologies. The DRAM business appears endangered for all these companies.

Micron reported its first quarter fiscal 2012 results last week, with a net loss of $187.0 million or 19 cents per share, compared to net income of $155.0 million or 15 cents in the year-ago quarter. Its DRAM segment was the weakest performer partially offset by a stable performance by the NAND flash segment.

DRAM revenue fell 8.9% sequentially in the third quarter for Samsung due to a 17.0% decrease in the average selling price (ASP). However, Samsung managed to grow its market share by 3.0%. But the market share of Elpida, Nanya and Hynix fell to some degree.

Now, this lingering concern could give rise to industry consolidation. Last week, a Japanese business daily (Nikkei) published the news of a possible merger between local chip maker Elpida and its Taiwanese rival Nanya Tech. However, Nanya's chairman completely denied the statement stating that they are caught up in a legal patent issue.

We think that consolidations could save the DRAM market from its present predicament. If the Elpida-Nanya Tech merger materializes, their joint market share will get a solid boost. But this could hamper Nanya’s relation with Micron as they share a long-time partnership. In a way, the merger may not prove beneficial for Micron, but for the overall industry.

Market sources state that manufacturers have already restricted their production capacity and have put a check on their inventories. The initiatives are showing good results on DRAM pricing.

Based on this news, we look forward to better DRAM fundamentals in 2012.

Currently, Micron has a Zacks Rank #3, implying a short-term Hold recommendation.

 
DELL INC (DELL): Free Stock Analysis Report
 
HEWLETT PACKARD (HPQ): Free Stock Analysis Report
 
MICRON TECH (MU): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research