Can Micron Bounce Back After a Poor Quarter?

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

The biggest computer memory manufacturer in the U.S., Micron Technology (NASDAQ: MU), came out with mixed results in the second quarter. The company managed to trump the Street’s revenue expectations but fell short on bottom line estimates, sending shares down some 4%. Let’s see how the quarter went for Micron and how it might fare going forward.

A brief review of the quarter
Although the company saw a 20% jump in shipment of its DRAM and NAND chips, a weak pricing environment kept the top line from going north. As a result, revenue remained flat at $2.07 billion in the quarter as compared to last year.

Oversupply in the industry has led to a decline in prices of chips, hurting the company’s margins in the process. Micron’s gross margin fell to 13% in the quarter from 19% last year. Thus, despite seeing its shipments rise, Micron swung to a loss of $224 million in the quarter from a profit of $72 million in the second quarter last year.

Elpida reprieve?
After Japanese computer memory maker Elpida filed for bankruptcy last month, it is widely expected that DRAM prices will rise. This is not surprising when you consider that Elpida accounted for around 12% of worldwide DRAM supply and its bankruptcy will affect the equation of the market forces.

Moreover, Micron threw its hat into the ring for acquiring Elpida’s assets with a $1.5 billion bid. The news was greeted with joy by investors and sent Micron’s stock soaring. The move from Micron is not much surprising as such an acquisition might help it make more cost-effective NAND chips, provided it alters Elpida’s plants for that purpose.

The way ahead
Micron says that the pricing environment for DRAM chips is improving and I believe the previous paragraph explains why. However, I won’t count on Micron’s DRAM business much if I am looking at it for a long term investment. DRAM is used in PCs and now we are in a post-PC world. And that’s the reason why taking a look at Micron’s NAND segment, the chip which is used in memory of mobile devices, will make more sense.

Solid-state drives (SSDs) are used for storing data in mobile devices and data centers for cloud computing. Now these SSDs use NAND-based flash memory. Taking into account the growth rate of mobile computing devices such as tablets and smartphones and the advent of ultraportable computers like the Ultrabook, one can expect Micron to see better days in the future. Moreover, cloud computing is touted to grow at a compounded rate of almost 40% annually for the next four years, thus giving rise to more data centers. This will provide Micron with more fuel to propel its top line north.

Micron is making moves to ramp up its NAND business. Keeping this in mind, it restructured its IM Flash arrangement with Intel (NASDAQ: INTC) and will acquire 18% of Intel’s interest in the IM Flash operation based in Singapore at an estimated cost of $600 million. According to the provisions of this agreement, Intel will be making a deposit of $300 million with Micron, which could either be refunded or set-off against future purchases by Intel under the agreement. This will provide Micron with added capacity and also help it improve margins going forward.

The takeaway
Pricing pressures played havoc with Micron in the just-concluded quarter. The expected revival of DRAM prices will give Micron some respite as it struggles through a difficult phase. But a look at the moves it is making in order to push up its NAND business gives me hope that Micron can return back into the black going forward. 

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