This Stock Might Have Disappointed You This Year, but Selling It Would be foolhardy

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

2012 has been a disappointing year for Micron Technology (NASDAQ: MU) investors, with the stock essentially at the same level where it was when the year began. After a strong beginning, the stock price started losing momentum when Micron posted mixed results in the second quarter, followed by another abysmal bottom line performance in the next one.

A weak pricing environment and low sales of PCs have turned out to be the proverbial monkey on Micron’s back, leading me to the conclusion that the company is in for tough times after its fourth-quarter results. And if any Micron investor was hoping for a happy end to 2012, the company’s recently-released results must have put an end to those hopes. In addition, I won’t be surprised at all if the stock ends the year in the red due to the negativity around it.

But the year is almost over, and it’s time for a fresh beginning. A Micron investor, and anyone else who is looking to buy the stock at its current levels, would be hoping for a bounce back in 2013. However, the seas are still rough out there for Micron and the stock might be in for another rocky ride next year. Declining sales of PCs have hit DRAM (Dynamic Random Access Memory) sales and prices hard, while the NAND business has had its own problems.

Throw in macroeconomic concerns, and the fact that DRAM sales account for one-third of Micron’s top line, the picture becomes gloomier. But, going by Warren Buffett’s “Our favorite holding period is forever” tenet, I am going to look beyond just one year, and we will eventually see that Micron isn’t too bad a stock to invest in over the long run.

A Painful, but Positive Transition

The DRAM business is a sore point for Micron, which is not surprising since demand for PCs is falling as consumers switch to mobile devices. Micron knows this and that’s why it’s making strides in NAND flash, which is used in making memory for mobile devices such as smartphones and tablets. Micron has gradually bumped up sales of its NAND solutions, and they accounted for 44% of total sales in FY12, up from 30% in FY10.

During the same time period, DRAM sales winded down to 39% from 60%. While this is indeed a positive trend which tells us that Micron is headed in the right direction, it should also be noted that the NAND business has also endured some rocky moments. NAND flash oversupply pressured prices and Micron’s top line this year. But now it seems that the worst is behind. Makers of NAND flash tightened production, and this resulted in a 5% bump in average selling prices in the previous quarter.

The overall performance of the NAND business did go down in the previous quarter, but that can be attributed to manufacturing glitches which management states have been taken care of. It can be said without a doubt that demand for NAND flash is set to grow over the long run, driven by solid-state drives (SSDs), smartphones and tablets. Also, according to IHS iSuppli, the NAND market has staged a turnaround of late on the back of the aforementioned devices, and this bodes well for Micron.

To The Future

As I have already said, the future of Micron’s NAND business will be driven by growth in sales of mobile devices, SSDs and possibly hybrid drives. The company witnessed a 20% jump in sales of SSDs in the previous quarter. In addition, the company also saw improved adoption of its enterprise-class SSDs and it is intent on improving its technology further which it needs to do in order to ride the impending revolution in storage.

And then there’s the Elpida deal, which should make Micron stronger in my opinion. The deal had run into some rough weather, but recently received approval from the Japan Fair Trade Commission and is expected to close in the first half of 2013. On one hand, Elpida would help Micron in cutting its teeth into the booming mobile DRAM market, and on the other, it has helped it land a lucrative account in the form of Apple (NASDAQ: AAPL).

As Apple looks to diversify its supply lines and moves away from Samsung, it is looking for alternative component suppliers. As a result, the Cupertino-based behemoth had awarded Elpida a contract last year for supplying memory for the iPhone and the iPad. Apart from this, the Elpida deal would hand Micron better pricing power in the PC DRAM market as well, as Micron’s share of the market would double.

And then, Micron has another solid partnership in the form of Intel (NASDAQ: INTC) for manufacturing NAND flash memory. This joint venture, known as IM Flash, seems strategically sound as Intel’s expertise would help both of them create better products, which they are already doing. Thus, a foray into the booming SSD market backed by chipzilla, Intel is certainly encouraging as the synergies of the joint venture would result in a win-win situation for both and help Micron see better days in the long run.

The Takeaway

Micron is not a stock which is guaranteed to stage a turnaround in 2013 after a dour 2012. But as I pointed out during the course of this discussion, the company is changing with times and hence the pain. Falling sales of PCs have proved to be the Achilles’ Heel for Micron, but it is gradually ironing that out and the results are coming out positively. Micron’s ship is sailing in the right direction and a bit of patience could do wonders in the long run, if not in 2013.


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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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