Micron’s Engagement to Elpida Marks the Beginning of a Turnaround

By Harsh Chauhan - July 3, 2012 | Tickers: AAPL, INTC, MU | 0 Comments

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I have been a Micron Technology (NASDAQ: MU) bull for quite some time now. But the stock’s choppy performance over the last year has done nothing to justify my stance. However, things are about to change for Micron.

What happened?

Micron, which had won the exclusive rights to bid for Elpida a couple of months back, has agreed to purchase the Japanese memory maker in a deal worth $2.5 billion. This brings Micron full circle since it threw its hat into the ring for acquiring Elpida in March this year. Micron will pay $1.75 billion of the consideration in interest-free installments till 2019 for paying off Elpida’s debt, with the rest being paid in cash.

What next?

For starters, Micron’s share in the DRAM market will now double, leaving the market with just three major players to fight it out. The company has been struggling for the last year because of plummeting prices, driven by oversupply in the industry. Elpida’s acquisition will ease some pressure on Micron as it can now adjust its production according to the demand in the market, accelerating or slowing production when needed, enabling Micron to bring some stability to its pricing.

Moreover, Micron would now mount a challenge to Samsung’s supremacy in the market for mobile DRAM chips. Samsung is the undisputed leader in this business and ranks way ahead of its nearest competitor, SK Hynix. But the combined entity of Micron and Elpida is expected to eat into Samsung’s supremacy.

With Elpida’s acquisition, Micron has staked its claim to become the next Apple (NASDAQ: AAPL) derivative play. Apple handed Elpida a contract for supplying memory for its iPhone and iPad last year and might well become the prime supplier of DRAM chips for Cupertino’s creations. And I would be watching this one closely, since Apple’s component suppliers have been outperformers in the past and Micron might well be on its way to join this elite league.

So what?

Micron has been showing signs of revival lately. DRAM prices stabilized in the previous quarter, increasing 12% year over year and helping Micron’s DRAM business grow 20%. In addition, its enterprise solid state drive (SSD) business shot up by 33%. Although Micron’s NAND pricing was a sore point, analysts expect this segment to gradually improve toward the back end of the year.

Also, a partnership with Intel (NASDAQ: INTC) is expected to provide Micron further shots in the arm. Intel makes flash memory products through its IM Flash agreement with Micron, and agreed to make purchases worth $300 million from Micron after both the parties restructured their deal earlier this year. And who knows, Intel might even invite Micron to the Ultrabook party in a big way, especially considering that it has been making some cutting edge SSDs for use in Ultrabooks.

Micron’s investors have been on cloud nine since the news broke out. The company expects to close this deal by the first half of 2013 and anticipates it to become accretive to earnings and cash flows in the first year itself. This probably marks the turning point for Micron, as the company has failed to perform to its potential even though it has seen its shipments grow. The bane of weak pricing is slowly disappearing in the rear view mirror and Micron is ready to grab a significant pie of both the DRAM and NAND chip markets. And then, there’s the possibility of having Apple on your list of clients. All these developments are pointers that Micron is indeed turning around, and you should certainly keep an eye on it. 

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