Micron Can Be a Good Deal Under the Right Conditions

Memory chip maker Micron Technology (Nasdaq: MU  ) recently came out with fiscal third-quarter losses that were much wider than what analysts had expected. However, what's proved to be even more disappointing is the fact that Micron has made its biggest yet, fourth consecutive quarterly loss.

So what seems to be the real problem with Micron? Before we delve into the details, let's take a closer look at the numbers.

The numbers
Micron's revenue increased 8% on a sequential basis, although it remained relatively flat from the prior-year period. This was mainly because of a 20% sequential increase in revenue in the DRAM segment -- the result of a combination of higher sales volumes and average selling prices.

Unfortunately, on the other hand, Micron incurred a loss amounting to $320 million, as part of a series of quarterly losses mainly caused by the prevailing softness in the flash memory market. Revenue from the company's NAND segment remained largely flat, despite a whopping 40% increase in sales volumes, mainly because of weak market prices.

However, one can take heart from the fact that these problems are not specific to Micron, as its peers in the NAND industry have also been having a hard time of late. For instance, flash memory king SanDisk's (Nasdaq: SNDK  ) net income declined almost 50% as compared to the prior-year period because of weak market prices.

The bright side
Micron has a few other reasons to feel happy as well. Demand in the DRAM space is beginning to show some signs of bottoming out. Plus, a further boost in the DRAM segment should occur when Microsoft releases its newest Windows 8 operating system, which in turn, should stimulate demand from Micron's OEM customers, namely Intel and Hewlett-Packard.

Micron is also in the process of taking over the bankrupt Japanese DRAM manufacturer Elpida Memory. If the company is successful, this would double Micron's market share in the DRAM space and should somewhat reduce competition as well. Nevertheless, the positive effect of this development remains to be seen.

The flip side
But the company has its share of concerns, too. The NOR flash space is witnessing tough times. According to a TechNavio analyst forecast, the global NOR flash market will decline at a CAGR of -5% from 2011 through 2014 mainly because of a decline in average selling prices. However, the increasing demand for NOR chips could be a long-term positive in this direction.

The NAND flash space is also passing through a turbulent phase, and Micron could see this segment of its business take a hit in the coming months. This is because NAND flash memory chips, used in mobile devices and solid-state drives, or SSDs, have been facing weak demand, coupled with oversupply issues of late.

The Foolish bottom line
Micron is currently trading at a price-to-book ratio of just 0.7, which at first makes it seem attractive. However, I'd prefer to watch from the sidelines until Micron starts putting some cash on the table. The company's acquisition of Elpida could work in its favor in the long run, provided there is a significant improvement in the DRAM space.

Keep an eye on Micron by adding it to your free watchlist.

But, if you are not too enthused about Micron's possible recovery, you can check out this special free report called "The Motley Fool's Top Stock for 2012". The report won't be there forever, so click here to get it while it's still available.

Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of Microsoft and Intel. Motley Fool newsletter services have recommended buying shares of Intel and Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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