How To Play the Growing Demand for Flash Memory

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Micron Technology (NASDAQ: MU) is a leading maker of memory products for use in a variety of electronic devices.  Although revenues are almost triple what they were ten years ago, Micron’s earnings have not reflected that (see below), and the company has actually lost money during five out of the last ten years, with a loss projected for the current fiscal year as well.  With recently declining revenues, is there a bright future on the horizon for Micron, or should investors just stay away?

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Micron Technology produces dynamic random access memory (DRAM) and flash memory for electronic devices including computers, smartphones, and mp3 players.  The company’s general strategy is to diversify its product line, especially by developing its flash memory products. 

The market for memory is a tough one to crack.  While the demand for memory has increased significantly every year in recent history, this is offset by the fact that memory prices have declined by an average of 20% per year. 

Where the real opportunity exists for Micron is in the recent emergence of handheld devices such as tablet PCs and smartphones.  An additional area is in the increasing sales of Ultrabooks (which use solid-state drives) and the increasing popularity of solid-state drives in general as prices become more competitive with traditional hard disk drives.

Also, to share in the costs of building and operating their plants, Micron has formed partnerships with some other big tech companies, most notably Intel (NASDAQ: INTC).

Intel and Micron have teamed up in a joint venture called IM Flash Technologies.  The company aims to combine Micron’s leadership in process and product technology with Intel’s history of innovation in Flash memory technology to successfully compete in the NAND Flash memory business. This venture began in 2006; however, just last year the companies announced their agreement to expand the operation.  If you believe in the emergence of new flash technologies, Intel might be a less risky way to play it, with its stable track record of earnings growth, not to mention its yield of over 4%.

Since Micron lost money last year and is projected to lose money this year, a traditional valuation method such as TTM or forward P/E analysis is meaningless.  Whenever you buy a company that is losing money in the hopes that things will turn around, you are taking a gamble.  Micron is expected to lose 54 cents per share this year; however in fiscal years 2014 and 2015, the company is expected to earn 53 cents and 83 cents per share, respectively.

In other words, if all goes according to plan, and demand for flash memory heats up with increasing tablet and smartphone sales, you could be buying the stock at just 9.5 times 2015’s earnings, when it could be growing at a very high rate.  If things start going poorly for Micron, however, the stock could take a turn for the worse fast, and in fact the stock was trading under $4 as recently as 2011 on bad news. 

As far as competitors go, there are few publicly traded companies that are similar to Micron (most are privately held), but one that is pretty close for comparative reasons is SanDisk (NASDAQ: SNDK).

SanDisk makes a variety of flash storage card products, such as the tiny memory cards used in digital cameras and smartphones.  SanDisk trades at 14 times forward earnings of $3.63 per share, which are expected to grow by 10.5% and 13% over the next two years, respectively. 

Additionally, SanDisk has a net cash position (cash minus debt) of over $16 per share  Subtracting this out of their current share price of just over $50 gives an even better forward P/E ratio of 9.5.  As far as the flash memory sector goes, SanDisk looks not only very attractively valued, but a much safer play based on its stable record of earnings growth and adding to its cash pile.

In conclusion, while Micron may look like a very cheap stock right now, it needs to get a whole lot cheaper.  I would personally wait until the company’s earnings release in mid-March before making a move, but I do have a feeling that Micron’s turnaround will be a success.  If you are bullish on the use of flash and solid-state memory devices over the next few years, as I am, this is one gamble that could pay off big time, as long as your entry price is a little better.

KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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