Can we expect a return to profitability in the next few months for DRAM and NAND FLASH makers?

Chipmakers like Toshiba (6502 JP) or Elpida Memory (6665 JP) have been hit very hard recently due to falling prices of memory chips. Now everyone would like to know the answer to: “When are prices going to turn around?” There are few reasons for that:

These stocks prices are at a bottom because many investors and hedge funds are expecting either a bankruptcy, or a need for some more capital increase, which would drive the stock even lower.

These stocks have been left out by investors and only short term investors (traders) are investing in it right now.

If prices in memory chips rebounds, then analysts will revise their forecast and investors could make 100% to 200% return in a very short time like with financial stocks in the US

So now, what do we see in the market right now. One, prices have been rebounding quite sharply actually from their December low. The median price of 16-gigabit NAND flash memory to large-lot users for February shipment rose for the first in 10 months and price of 1-gigabit DRAM for delivery in the first half of March to large-lot users was 0.74 dollar a move seen back in February but still an upward move.

Analysts in that sector are expecting demand for memory chips to rebound thru the April-June quarter. PC makers reduced their inventories so sharply that now they are at unsustainably low level. The result is expected to be a strong order recovery for chipmakers and probably an increase in prices as PC makers will want to make sure they have enough supply to meet consumption if there is a pick up in the second half of the year.

All that should be good enough reasons for investors to re-enter on stocks like Elpida Memory or Toshiba. But I would still remain very cautious even though I expect market players to jump into that trade in the short run. I am still concern about the extreme low level of prices. Right now 1-gigabit DRAM is selling at 0.74 dollar while Elpida’s CFO reminded me last year, in an investor meeting, that DRAM makers are profitable only when prices are between $2 and $2.50 for 1-gigabit DRAM.

In the end it might be another year before we can expect chipmakers to be profitable. For now they will remain under pressure of raising more capital to face the difficult environment they are in right now. It is possible that big conglomerate like Toshiba could behave much better in 2009 as the company‘s business is not only about NAND-Flash Memory production. However, I would not try to invest in Elpida as long as prices for 1-gigabit DRAM are below $1.50.