Micron's Turnaround is Not Too Far

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

Micron Technology’s (NASDAQ: MU) problems are just not ending. The apparition of weak pricing has haunted it for quite some time now and the same was seen in the third quarter. While it was the dynamic random access memory (DRAM) business which was playing havoc with the company’s margins earlier, the NAND business also came to the party this time around. As a result, Micron’s streak of posting losses extended to four consecutive quarters.

DRAM’s back on track…

Falling DRAM prices have hurt Micron in the past, but this time the segment stabilized as average selling prices of DRAM products remained consistent with the second quarter. The stability of prices, when combined with a 12% jump in shipments, helped Micron’s DRAM business grow 20% from last year. Moreover, the company said that selling prices of the PC DRAM market have shown sustained strength over the last quarter and are expected to follow this trend going forward.

…NAND takes the opposite route, but not for long

But it was the NAND Flash business which proved to be the monkey on Micron’s back in the quarter. Although shipments increased 40%, soft pricing of NAND products contributed to Micron’s shrinking margins. But Micron also provided a couple of positives. It managed to bring down the production cost of multi-level cell (MLC) NAND, which is used in enterprise solid state drives (SSD), by 29%. In addition, Micron’s enterprise SSD business is growing rapidly, exhibiting an impressive 33% spike from the second quarter.

Slipping into the red

Micron’s equation is simple. Although the demand is there, it’s catering to that demand at low prices driven by market forces. Hence, even though Micron’s revenue jumped to $2.17 billion and finished impressively ahead of the Street’s $1.99 billion target, it didn’t prevent the company from a loss. Micron swung to a loss of 32 cents a share, failing to meet consensus projection of 20 cents, in stark contrast to profit of 7 cents posted a year back. But now, it seems like Micron won’t need to experience such pains for long, as the prospects ahead of it look good to say the least.

NAND to improve

NAND flash is used in smartphones and other mobile computing devices. However, demand for these chips hasn’t grown in tandem with the supply, leading to an oversupply in the industry which has in turn pressurized prices. But, the signs are clear that this trend is going to change. The launch of the highly-anticipated Ultrabooks by chip giant Intel (NASDAQ: INTC) later this year, which use SSDs as storage medium will help bridge the demand-supply imbalance to some extent. Intel is coming with Ultrabooks in a big way to challenge Macbooks and will probably release more than 75 models this year. This vast army of Ultrabooks will certainly need a lot of NAND flash and push up the demand side of NAND products and help pricing gain momentum.

Analysts believe that prices for NAND products will start improving as we step into the second half of the year as newer smartphone models are launched along with SSD toting notebooks. If that is indeed the case, Micron’s prospects certainly light up.

Elpida looks like a trump card

Also, it seems that the bankruptcy of Elpida has helped DRAM prices stabilize. And Micron’s interest in Elpida is not surprising at all, a fact which was very well explained by Fool analyst Anders Bylund. Apart from the production facilities of Elpida that Micron is raving about, the deal would also bring a new customer in the form of smartphone giant Apple (NASDAQ: AAPL) to Micron’s books if the deal goes through.

Seemingly, Apple doesn’t want to see arch-nemesis Samsung as a component supplier for long. As a result, reports suggest that Cupertino has cast its benevolent eyes on Elpida for DRAM chips and this might be another reason for Micron to go all out for acquiring the troubled Japanese memory maker. Apart from that Micron will be able to modify Elpida’s plants to produce NAND flash as well if required. Thus, this deal seems to be a win-win situation for Micron and I believe that it will try its best to complete the purchase.

The takeaway

To round everything off, I believe Micron’s businesses have a lot of potential. It’s just the pricing which isn’t falling into place. But as mentioned above, DRAM prices are already on the upswing and NAND prices are expected to follow suit. The opportunities from Intel’s Ultrabooks, possibility of having Apple as a customer and growth in enterprise SSDs, which are probably going to replace hard disks in datacenters, are points that simply can’t be ignored since they are quite capable of taking Micron back into the black.

TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Intel. Motley Fool newsletter services recommend Apple and 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.If you have questions about this post or the Fool’s blog network, click here for information.

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