Please ensure Javascript is enabled for purposes of website accessibility

Why Greenlight Capital Would’ve Loved to Buy Micron at a Lower Price

By Harsh Chauhan - Feb 25, 2014 at 6:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

David Einhorn is pursuing the identity of the blogger who revealed his Micron position. Let's see why.

Hedge fund manager David Einhorn is probably furious. His Greenlight Capital had to buy Micron Technology (MU -3.92%) shares at inflated prices after an anonymous blogger on the website Seeking Alpha leaked the hedge fund's stake in November. This happened on the same day when Greenlight requested confidentiality from the SEC to build its Micron position, according to The Wall Street Journal.

Greenlight believed that the "disclosure of Greenlight's position would materially impair or possibly eliminate Greenlight's ability to successfully pursue its investment strategy." As such, it is quite understandable why Einhorn is pursuing the identity of the anonymous blogger and intends to sue the person who leaked the information.

Micron shares have surged close to 33% since the leak on Nov. 14 last year and currently trade near their 52-week highs. Greenlight is probably under the impression that its vote of confidence in Micron encouraged investors to buy more shares, leading to an increase in the price and thereby reducing the probable returns. But, looking at the positive side of things, I believe that this is yet another reason why Micron is still a solid buy despite gaining more than 250% in 2013.

Looking beyond the noise
Einhorn recently revealed a $1 billion long position in Micron, and it is quite understandable why he made this move. Favorable trends in the DRAM and NAND industry, a masterstroke in the form of the Elpida acquisition, and key smartphone customers such as Apple (AAPL -1.51%) are some of the trends which make Micron a solid buy going forward.

Memory makers are keeping supplies tight in 2014, as a result of which DRAM prices are expected to rise once again this year. Annual sales growth of the industry is expected to exceed 10%, while DRAM revenue is expected to rise 12%, according to DRAMeXchange.  In addition, the DRAM industry is expected to become more profitable this year as a result of consolidation.

Three players -- SK Hynix, Samsung and Micron -- control 90% of the DRAM industry, which gives them the advantage of adjusting supplies to keep prices stable. In addition, last year's fire at Hynix's Wuxi facility in China is expected to cripple production and restrict supply in the industry, leading to higher prices.  

According to Digitimes, even though Hynix has resumed operations fully at the Wuxi fab, but a drop in yield rates has led to rejection of shipments by PC vendors. This creates a favorable environment for Micron in the DRAM industry this year.

No dearth of opportunity
Moreover, the increasing use of DRAM in mobile devices will be another catalyst for Micron. According to TrendForce, mobile DRAM is will probably account for 36% of the DRAM industry, outpacing PC DRAM's 30% share.  Micron is in a key position to exploit the growth of mobile DRAM due to its Apple relationship.

Apple used Elpida DRAM in the iPhone 5s last year. Before that, Apple had also tapped Elpida for the iPhone 5. This suggests that Micron has now landed a lucrative account for itself. Going forward, the deal with China Mobile and the launch of exciting new products should be key tailwinds driving Apple's device shipments. Apple is reportedly planning to introduce large-screen devices this year to step up its game when compared to Samsung and other Asian manufacturers. 

The addition of a new, and big, market in the form of China and the development of new products could help Apple increase sales this year, and Micron would merrily tag along.

Apart from these opportunities, Micron is seeing strong adoption of its solid-state drive (SSD) components. The company's product development on this front is also laudable. Micron has developed a 20-nanometer enterprise drive and this product is already gaining traction at key customers. Moreover, Micron expects a bump in average selling price in the NAND business due to an increase in the sales of embedded products and SSD components.

The takeaway
As I said earlier, Einhorn's position is simply a vote of confidence in Micron's prospects. The revelation of a long position by a prominent hedge fund manager shouldn't be taken as the only reason behind Micron's surge in the past few months. And for those of you who are thinking that Micron would be very expensive after all the action in the past year or so, it trades at just 15 times last year's earnings, making it a solid investment opportunity at a reasonable valuation.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Micron Technology, Inc. Stock Quote
Micron Technology, Inc.
$60.51 (-3.92%) $-2.47
Apple Inc. Stock Quote
Apple Inc.
$171.52 (-1.51%) $-2.63

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.