Mourn Micron's Memory

Poor Micron Technology (NYSE: MU) can't seem to catch a break these days.

CEO Steve Appleton thinks that his company is performing fine in selling, general, and administrative expenses. They fell to $112 million this quarter, after five quarters with $145 million in average SG&A costs.

But that doesn't help when the market won't let you make a profit from your sales. Sales were essentially the same as in last year's first quarter, despite much higher unit volumes in every product category. In the end, Micron's gross profit was a meager $5 million on $1.54 billion in sales.

It's all part of a vicious circle that started about a year ago. Expecting Microsoft's (Nasdaq: MSFT) Windows Vista to drive a massive upgrade cycle among the computer users of the world, memory makers like Micron, SanDisk (Nasdaq: SNDK), Infineon (NYSE: IFX), and Samsung started churning out huge quantities of memory chips. This drove down the selling prices, thanks to the laws of supply and demand -- but Vista would come to the rescue soon, right?

Well, it kinda did, and it kinda didn't. Vista has been successful enough to drive up Microsoft's own sales and profits, but not nearly on the scale that the memory industry and other hardware makers had expected. So they made even more parts. You know the drill: Take a loss on every unit, but make up for it in quantity.

This is well beyond the control of Micron or any other single company. Stop the factories for a month, and you'll lose out on tons of sales, mindshare, and market exposure. But the other guys will still continue their oversupplying ways, so you're not helping the pricing situation much. All you can do is churn out more chips and hope for a demand spike sooner or later.

Solid-state hard drives could provide exactly that kind of boost over the next year or two. Micron is ramping up its own line of these speedy mass-storage devices, hoping to land some notebook customers in the first wave of the new technology. The competition will be a mix of today's hard drive specialists like Seagate (NYSE: STX) and memory specialists like SMART Modular Technologies (Nasdaq: SMOD).

With enough demand for these devices, there might still be hope for memory prices. But it'll take some time. For now, just shed a tiny tear for Micron, and wait for the market to hit rock bottom before you buy.

Further Foolishness:

• Foolish Forecast: Micron's Puny Prospects
• Contrarian Shopping List
• Buy Quality on the Cheap

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