Time to Invest in Micron?

By Sandeep Gupta 

Sandeep is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Micron Technology (NASDAQ: MU) shares jumped by over 10% after reporting a loss of $286 million for second quarter of fiscal 2013. Such a reaction from the market makes one wonder what is actually happening and where is the company heading. Let us dig deep into Micron and figure out its potential for returns.

Financials

Although the quarterly y-o-y revenue growth was 3.4%, revenue climbed 13.3% in comparison with the previous quarter. The performance is a direct result of a 38% jump in sales volume in DRAM products.

The loss per share has remained almost constant for last couple of quarters. These figures are pointing toward a big problem Micron faces. The average selling price for the memory products has decreased much faster than any decline in costs. Moreover, losses related to new acquisitions are also adding to the uncertainty. 

Percentage change in average selling prices

Year	DRAM	Trade NAND Flash*
2011-2012	-45%	-55%
2010-2011	-39%	-12%
2009-1010	28%	26%
2008-2009	-52%	-52%
2007-2008	-51%	-68%

* Trade NAND Flash excludes sales to Intel from IM Flash.

Challenges

The future of the semiconductor industry depends on innovation. Present semiconductor memory technologies, such as DRAM, NAND Flash and NOR Flash, are facing tough headwinds stemming from high costs, falling prices, high power consumption and large sizes.

To meet these challenges, Micron is in need of a well balanced strategy that could address critical issues on multiple fronts:

Growth

- Develop new technologies to meet market demand

- Achieve cost efficiency to reduce losses

- Successful marketing to keep demand high

- Balance of earnings and investments to drive growth

- Need for large capital investments to modernize manufacturing facilities

Sales and operations

The majority, or 85%, of Micron’s revenue comes from international customers. Moreover, a large number of manufacturing units are located outside the U.S. Some of the issues that require attention are:

- Unstable demand levels

- Political and economic Instability

- Changes in the economic policies of foreign governments

- High and fluctuating import and export duties

- Cultural and language differences.

Competition scenario

The semiconductor industry is highly competitive, and is dominated by large players. Micron faces stiff competition from the likes of SanDisk (NASDAQ: SNDK). New competitors, such as Seagate Technology (NASDAQ: STX), are strongly focused on diversification, and are introducing new and innovative products that pose a serious challenge to Micron's very existence.

Shares of SanDisk have almost doubled since 2010 and earnings per share are expected to grow by more than 10% in the coming years. The company has a market cap of approximately $13.4 billion with a high operating margin of 13.8% against the industry average of 12%. Analysts are positive about the company, and are expecting great returns in the near future.

Moreover, SanDisk is spending heavily on innovation and is regularly launching new products, such as the iNAND Extreme Embedded Flash Drive inspired by modern technologies. These findings make SanDisk a must-buy stock.

For its part, Seagate has introduced a third generation solid-state hybrid drive, which places it in direct competition with Micron. Though the company has produced good quarterly results, analysts believe that future prospects are not very bright.

A major part of Seagate's revenue comes from the hard drive business. The market, however, has started shifting toward the solid-state drives and weakening demand for hard disk drives is expected. The company is in deep need of urgent diversification to avoid wiping out and the investment outlook isn't promising. 

What to expect

Micron has been successful in building up a complete product portfolio in the semiconductor memory industry. The company spends a large portion of its revenue on R&D, and has well positioned itself to meet competition by strategic joint ventures and acquisitions. Second quarter revenue for fiscal 2013 was well ahead of Wall Street analysts expectations.

Micron is facing critical issues on multiple levels. The company, however, has exhibited an average revenue growth rate of more than 19% for the last three years against an industry average of 11%. Analysts are expecting average EPS growth rate of more than 14% in coming years.

These findings suggest that the company has great potential to recover from losses and generate a high return on investment in both short and long terms. This makes Micron a must-buy stock.

More Expert Advice from The Motley Fool

While Seagate Technology pays a significant and growing dividend and seems able to generate the cash flow to support it, a global slowdown in demand for digital memory storage has begun to put pressure on margins. Is Seagate worthy of your investment consideration (and dollars)? The Motley Fool answers this question and more in our most in-depth Seagate research available for smart investors like you. Thousands have already claimed their own premium ticker coverage, and you can gain instant access to your own byclicking here now.

Sandeep Gupta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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