A Tough Road Ahead for Micron Technology

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Micron Technology (NASDAQ: MU) has been trying to effect a turnaround for some time but its efforts aren’t bearing much fruit. A mix of low pricing and falling demand pushed Micron deeper into the red in its recently-reported fourth quarter, and it failed to match consensus estimates.

What Happened

On one hand, the company was expecting that its DRAM business will be back on its feet, driven by improved pricing and on the other; NAND prices were expected to stabilize. But none happened. Although DRAM pricing was stable, a fall in demand for DRAM chips due to weakness in the PC market weighed on Micron’s results.

The situation in the NAND business was worse, where both sales and prices declined. The NAND chip industry is in an oversupply situation and this isn’t helping Micron at all, as it has led to price declines. A weak performance by both DRAM and NAND businesses pulled down Micron’s top line 8% from the year-ago period to $1.96 billion in the quarter and net loss jumped to 24 cents per share from 14 cents last year.

Concerns Galore

Micron has been lackluster over the last six months, losing 30% of its value. It has suffered from weak pricing and the way ahead seems cloudy at the moment. With the impending release of Windows 8-based PC’s and the charge of Intel’s Ultrabook brigade, I had expected DRAM demand to pick up. However, sluggish sales in the previous quarter suggest that PC makers are yet to step on the gas.

Moreover, NAND oversupply is another area of concern for Micron. NAND flash is used in mobile devices such as smartphones, tablets and Ultrabooks. Similar to DRAM, NAND demand should have also grown as the holiday season is less than a quarter away but that wasn’t the case. In a previous post, I had said that NAND flash demand should improve with the launch of Ultrabooks by Intel.

The chip giant is expected to unleash a flurry of Ultrabooks in order to compete with the MacBook. These Ultrabooks use solid-state drives (SSD) for storage. Some also come with a hybrid storage option, using both traditional hard drives and SSDs. But it seems that Micron hasn’t been able to benefit from these opportunities so far.

Moreover, cut throat competition in both DRAM and NAND has also proved to be a drag for Micron, although it might ease out in due course of time. Micron agreed to purchase bankrupt Japanese memory maker Elpida in July, a move that will increase its share in the DRAM market and result in improved prices. But the sluggishness in PC demand will continue to weigh over Micron.

Some Possible Positives

But there is one positive takeaway that I would like to highlight over here. If Micron completes its acquisition of Elpida, it would find a way into the supplier list of Apple (NASDAQ: AAPL). The Cupertino-based behemoth is looking to diversify its supply lines and reduce its dependence on arch-rival Samsung. Hence, it had awarded Elpida the contract for supplying memory for the iPhone and iPad last year. The latest iPhone, which has been selling at a record-breaking pace, sports SDRAM supplied by Elpida, dethroning Samsung.

As far as the NAND market is concerned, Micron can expect prices to stabilize as NAND makers are tightening production. This fact was brought to light earlier this month when SSD maker OCZ Technology (NASDAQ: OCZ) cut its revenue forecast for the second quarter. OCZ couldn’t meet its customers’ demand as it faced supply constraints for NAND memory chips. This report from OCZ indicated that NAND makers are cutting down on production in a bid to support prices.

Final Words

The way things stand now, I would rather put Micron on my Watchlist and see how it steers through its difficulties. As I see it, Windows 8 and Ultrabooks haven’t ignited the company’s prospects yet and it is still waiting to cash in on the mobile computing boom in a big way. The Elpida acquisition, once complete, would brighten up Micron’s prospects and when prices stabilize, the company would be in a much better shape and hopefully return to profits. Till then, you can keep an eye on Micron by adding it to your Watchlist by clicking here

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