Keep an Eye on this Potential Turnaround
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Chipmaker Micron Technology (NASDAQ: MU) has had a wild ride this year. The stock kicked off 2012 on a decent note, but has been beaten down almost 25% over the last six months. The company’s performance has been handicapped by weak pricing of dynamic random access memory (DRAM) and NAND products. An oversupply in the industry has pinched Micron hard, leading it to post losses for four consecutive quarters as declining prices have played havoc with the company’s margins.
However, a few developments over the past couple of months suggest that things are turning around for Micron. The company is slated to release its fourth quarter results next week. While analysts don’t expect Micron to swing to a profit this quarter, I do believe that the company’s long-term prospects are pretty strong. We will now take a look at various factors that are driving Micron’s turnaround.
Weak pricing has proved to be Micron’s bane. While the company has seen decent growth in its top line on the back of solid volumes, industry oversupply has dragged down DRAM and NAND prices, decimating Micron’s margins and pushing its bottom line into the red. However, of late, Micron’s DRAM and NAND businesses have received some shots in the arm.
DRAM pricing stabilized in the third quarter and shipments jumped 12%, sending the segment’s revenue 20% higher year over year. Moreover, Micron stated that it expects DRAM pricing trends to remain consistent going forward.
As far as NAND pricing is concerned, there are positive developments for Micron on this front as well. Recently, solid-state drive (SSD) maker OCZ Technology (NASDAQ: OCZ) slashed its revenue expectations for the second quarter as it faced supply shortage of NAND flash memory chips that are used for making SSDs. And according to the demand-supply equation, this effectively means that NAND makers are tightening production in order to provide impetus to prices.
Elpida would be a Masterstroke, if it Goes Through
Early in July, Micron agreed to purchase the bankrupt Japanese memory maker Elpida in a deal valued at $2.5 billion. While the acquisition has run into some rough weather due to opposition raised by Elpida’s bondholders regarding its valuation, one can’t simply ignore the goodies that Elpida will bring along.
Firstly, Elpida’s elimination has removed another player from the DRAM industry, and this has probably contributed towards the strength in DRAM prices. Next, the acquisition would catapult Micron into second place after Samsung in the DRAM industry. In addition, Elpida had won a contract from Apple (NASDAQ: AAPL) for the supply of DRAM chips for the iPad and the iPhone last year.
Hence, Micron can expect to benefit through Elpida by finding its way into the iEmpire as Apple looks to reduce its dependence on arch-nemesis Samsung for memory chips. Recent reports suggest that Apple has reduced its orders from Samsung as it is looking to diversify its supply lines and Elpida is amongst the possible beneficiaries.
Micron’s management should provide more clarity on this roadblock on the earnings call next week while a Japanese court is expected to arrive at a decision on the matter on September 28, as reported by Reuters. However, it still remains to be seen whether Micron can finally close the deal in the first half of next year as Elpida's bondholders recently sprung up another roadblock.
Micron also dabbles in the SSD business, which is another plus for the company. While OCZ’s pain was a result of short supply of NAND, the company did say that demand was still very high. Thus, Micron is positioned to enjoy better synergy as it produces its own NAND memory, and uses it to manufacture SSDs.
Moreover, rumor mills are abuzz with the possibility of Micron throwing its hat into the ring for acquiring OCZ Technology. If this turns out to be a reality, Micron can expect to improve its top line further along with improved standing in the SSD market where OCZ is growing at a terrific pace.
After a rough ride, things finally seem to be falling in place for Micron. Opposition raised by Elpida’s bondholders might be weighing over investors’ heads, but hopefully there would be a speedy resolution in the matter. The company, which makes memory products for both PCs and post-pc devices, is slowly moving its focus towards mobile computing memory products.
With prices of its products stabilizing, and truckloads of opportunities in front of it, Micron looks poised to recover and get back into the black. To follow Micron’s turnaround, we have the perfect tool for you. You can add Micron to your Watchlist by clicking here and keep track of how it performs going forward.
The stakes are high and the opportunity is huge after Apple’s introduction of the iPhone 5, so to help investors understand this epic Apple event, we've just released an exclusive update dedicated to the iPhone 5. By picking up a copy of The Fool’s premium research report on Apple, you'll learn everything you need to know, and receive ongoing guidance as key news hits. Claim your copy today by clicking here now.
TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. 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.