This Company Is Primed for a Leap

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

Due to continued oversupply of DRAM (Dynamic Random Access Memory) modules and a 5% reduction in annual PC sales (in 2012), prices of 4GB DRAM modules had plunged to the $15 mark. As a result, manufacturers cut down on their production which created a strain on its supply, and eventually led to a price recovery. According to a recent report, DRAM module prices surged by 11% in January alone, and 4GB modules now cost around $18. But the report also stated that manufacturers are still not increasing production and suggests that prices may appreciate up to $25 per module. Naturally DRAM manufacturers including Micron Technologies (NASDAQ: MU) stand to benefit here.

Why Micron looks Attractive

According to IHS iSuppli September report, Micron Technologies had a market share of 20.7%, the highest level since it came into business. Samsung Electronics (NASDAQOTH: SSNLF) and Toshiba (NASDAQOTH: TOSBF) retained their top spots with 42.5% and 24.7% market share respectively. But due to falling PC shipments and gloomy notebook sales, the demand for DRAM modules was dwindling, which had been the root of Micron’s problems.

Desperate to gain market share, Micron Technologies announced that it would be acquiring Japanese chipmaker, Elpida Memory in a deal valued to for 200 billion Yen. Bondholders including Linden Advisors, Owl Creek Asset Management and Taconic Capital Advisors sprung in action stating that Elpida Memory’s fair price is around $3.6 billion, but the court rejected their appeal. Since the Japanese chipmaker filed for bankruptcy last year only, Micron Technologies was supposedly able to bag an undervalued company.

This acquisition would put Micron Technologies as the world’s second largest DRAM manufacturer, only behind Samsung. This would also boost its production capacity by nearly 50%. However, a lot has changed since last year and ultrabooks have become a raging consumer durable. According to a report by Juniper Research, ultrabook shipments could rise from the current 178 million to 258 million by 2016. This presents a huge growth opportunity for entire NAND industry, and Micron with its expansion would greatly benefit from this.

Moreover, the acquisition would be carried out in the Japanese currency, Yen. The currency has been depreciating continuously and has slid by nearly 21% over the last 6 months. For Micron Technologies, this translates into savings of over $350 million, and its future prospects appear even more attractive.

Peer Talk

Its peers Samsung and Toshiba have delivered mixed performance. Just over a year back, Samsung sold its hard drive segment to Seagate Technologies in order to focus on its core competencies. Its renowned Galaxy flagship has been giving serious competition to high end smartphone manufacturers while retaining the top spot in consumer durables. As a result, shares of Samsung Electronics have more than doubled since the lows it created last year. Toshiba on the other hand cut down on its SSD production, due to relatively high cost/GB. Moreover, its shares have remained flat over the last 1 year, and analysts are not expecting blockbuster earnings either.

Conclusion

Samsung and Toshiba may offer growth prospects, but their growth prospects are not dependent on just NAND disks. Since Micron Technologies is a pure-play DRAM module manufacturer, its stock performance is correlated to the appreciating prices of DRAM modules. Going by an independent report, there is still around 40% room for price appreciation, which will greatly impact the profitability of Micron Technologies. Its shares appear to be fairly valued and analysts estimate its annual EPS growth to average around 14%, for the next 5 years. Going by the rule of 72, an investment could yield 100% returns over a 5 year time frame. I think Micron Technologies is worth a buy rating.


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