When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at Micron Technology (NASDAQ:MU) today, and see why you might want to buy, sell, or hold it.
Founded in 1978 and based in Boise, Idaho, Micron sports a market capitalization of about $5.6 billion. Its stock has advanced only about 2% over the past year, and has averaged annual losses of 9% over the past decade and gains of 6% over the past 20 years.
The company has long been a major global semiconductor manufacturer, specializing in memory technology.
A key reason to consider the company for your portfolio is its business. Technology will likely always be with us, and machines such as our PCs and laptops keep requiring more and more memory. With Microsoft (NASDAQ: MSFT) coming out this week with its Windows 8 OS, PC sales, which have been flagging, should get a boost. That should boost demand for memory, as well.
Another attraction is the stock's valuation. Its price-to-earnings ratio is negative, as are its trailing year's earnings, but its price-to-book, price-to-sales, and price-to-cash-flow ratios are all well below their five-year average rates.
Also boding well for the company is its purchase of failed rival Elpida, which it's getting in a very good deal. Consider this: Elpida has been a memory supplier for Apple's (NASDAQ:AAPL) iPhones and iPads, so the deal brings Micron a new customer. It's a powerful one, too, with Apple having sold five million iPhone 5s in its first weekend, leaving our analysts marveling at how it has kept margins high despite its massive sales. Once combined with Elpida, Micron will be the world's second-biggest DRAM producer, after Samsung.
Then there's management. Micron actually lost its CEO, Steve Appleton, early this year in a plane accident. That was a blow to the company, as he had been at the helm of Micron during much growth. In such situations, investors are right to be watchful as new leadership takes hold. The Elpida acquisition is a promising sign, though, that new CEO Mark Durcan will be effective.
One reason to avoid this company and its entire industry is that technology is a fast-changing thing. A company may dominate its market, but some new technology may make it obsolete. Cloud computing, for example, is ushering in changes in how consumers and businesses manage their computing.
If you don't like volatility, you might want to steer clear of this stock, with its beta of 1.8. That reflects a stock that tends to rise (or fall) 1.8 times as much as the overall market. It's not surprising, since semiconductors are a cyclical business. In economic downturns, people and companies rein in their technology spending, hurting certain companies' performances. But as the economy recovers, so do most of the companies.
Another concern is that the memory business occasionally experiences supply gluts, which depress prices and hurt companies like Micron. Right now is one such period, with Micron's CEO recently citing price declines for PC memory chips. Such chips have become commodities, leaving their makers with less pricing power than makers of more specialized -- and branded -- items. Investors can take a bit of comfort in the fact that gluts affect everyone in the industry, not just Micron. And Micron, despite many price wars, has seen its sales (and, often, income) grow substantially over time.
These dynamics work both ways, too. In September, solid-state memory company OCZ Technology (NASDAQ: OCZ) cited demand outstripping supply for its wares, which was good news for companies such as Micron and SanDisk (NASDAQ:SNDK), which make NAND flash memory chips necessary for solid-state drives.
A glance at Micron's financial statements offers more concerns. Free cash flow, for example, turned negative last year, while net income has been shrinking in recent years, turning negative over the past 12 months.
The threat of dilution is another red flag, with the company's share count rising from about 800 million in 2009 to 1.05 billion the year after, though that has come down to just under 1 billion recently.
Given the reasons to buy or sell Micron, it's not unreasonable to decide to just hold off. You might want to wait for it to return to profitability and positive free cash flow, or for demand to surge for its wares.
You might also consider other chip specialists, such as Marvell Technology (NASDAQ:MRVL), or NXP Semiconductors (NASDAQ:NXPI). Marvel specializes in smartphone technologies and has promising ties to China, where the growing middle class should increasingly embrace the devices. It's also a player in solid-state drives, partnering with SanDisk and aiming to serve the cloud-computing arena. NXP aims to be a key supplier to the mobile-payment industry, which may grow rather large.
I'm going to pass on Micron at the moment. Everyone's investment calculations are different, though, so do your own digging and see what you think. Remember that there are plenty of other compelling stocks out there.
Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Apple and Microsoft. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services recommend Apple, Microsoft, and NXP Semiconductors . 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.