Micron's Macro Opportunity

There are one-hit wonders, and then there are those stocks that get hit only to come back for bigger and better gains in the future.

Who falls where takes more than just looking at a stock's price, so the fact that memory maker Micron Technology (NASDAQ: MU  ) saw its stock jump 12% over the past month and is up 20% so far in 2013 means we need to dig a little deeper to see whether there's any reason to expect this run-up to continue.

A mighty temblor
The seeds of Micron's spectacular performance thus far were planted more than a decade ago in a patent infringement lawsuit filed by Rambus (NASDAQ: RMBS  ) , which claimed to own the rights to the popular DDR -- double data rate -- memory chip, which is found in every computer, and demanded customers like Micron, Samsung, and Infineon Technologies pay it royalties. Micron countersued Rambus in 2000 claiming it was trying to monopolize the market.

Rambus seemed to have good standing. With the support of the industry's biggest players, the standards-setting organization JEDEC made Rambus' dynamic random access memory chips -- or DRAM -- the industry standard. DRAM and its various iterations are the most common type of memory used in computers today. But Infineon also sued Rambus saying it had hidden from JEDEC the fact that it had patents in place before presenting the designs for consideration.

While Rambus wasn't explicitly prohibited from doing so, members might have thought differently about granting its designs industry-standard status had they known beforehand. Samsung also leapt into the countersuit fray making just that sort of claim, and further said Rambus shredded key documents that would prove it hid that information from JEDEC.

Fast forward to today and in Rambus' lawsuit against Micron the judge ruled that while it did own the patents, it couldn't enforce them because of the document shredding. The judged said the most appropriate sanction against the chip maker for its egregious actions was to declare the patents unenforceable. He didn't buy Rambus' defense that setting up shredding days wherein 400 boxes of documents at a time were disposed of was part of routine file cleaning. The sword that had been hanging of Micron's head was lifted and its stock took off in response.

Setting the table
While that gives us its current valuation, what investors need to know is whether it is still worth buying tomorrow. First-quarter sales came in weaker than expected as the slump in PC sales continues to weigh on the industry. The growth of the tablet computer has cannibalized the PC market, with sales falling from 5% to 6% in the fourth quarter of 2012. Hewlett-Packard barely maintained its leadership position over Lenovo in the quarter, seeing its market share rise to 16.2% even as sales fell a half percent to 14.6 million units. Lenovo's sales surged 8% to just under 14 million units, giving it a 15.5% share.

The big hope for PC makers had been the introduction of Microsoft's Windows 8 OS, but the surge in expected sales failed to materialize. Yet new power-efficient chips from Intel are hitting the market, so there's still hope that the niche between a tablet -- on which it's hard to create content -- and a laptop will be one that can be filled. Microsoft's new Surface hybrid is seen as perhaps the last best chance to fend off the tablet computer onslaught.

To protect and serve
It's a tricky needle for Micron to thread because it serves all three areas, but analysts think the chip maker will hit pay dirt in the server market. Because tablets place such a large demand on cloud-based memory, the server platform will need greater memory backup. In the past, Micron was able to offset much of the drop in PC sales by generating higher margins on its server products.

At 15 times earnings estimates, Micron appears cheap, and it trades at its sales and book value, but with its enterprise value going for almost 20 times free cash flow, the memory maker isn't actually cheap. There's still a lot of risk built into the PC wars at the moment, which makes it hard to give Micron a ringing endorsement.

I'd watch how the Surface rolls out and keep track of the server markets before placing any bets. But let me know in the comments box below whether you think that now, with Rambus' sword of Damocles lawsuit lifted from Micron Technology's neck, it can now better focus on the task at hand.

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  • Report this Comment On January 18, 2013, at 11:04 AM, sold4gain wrote:

    "At 15 times earnings estimates, Micron appears cheap, and"......Where do you get 15x when it EPS estimates are negative?

  • Report this Comment On January 18, 2013, at 12:29 PM, Mathp wrote:

    How on earth can you publish an article about MU's future without even mentioning the Elipida acquisition?

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