The cash cost of producing DRAM flash memory products is now moving above its price, resulting in production cuts. In addition to the significant slowdown in DRAM capacity, its demand continues to grow even more slowly than its supply due to the rapid deterioration of the PC market. It is widely known that the giants of the memory chips sector are Micron (MU), Samsung (OTC:SSNLF), and Sk Hynix (OTC:HXSCL), a Korean-based chip manufacturer. Most notably, Micron, seeking to be the buyer of bankrupt Japanese chip maker, Elpida Memory (OTC:ELPDF), is now in the headlines after it was chosen by a Japanese court to be the buyer.
Analysts feel Micron's acquisition of Elpida should be a major catalyst to improved profitability in 2013 and beyond. Elpida's research and development initiatives, experience in mobile DRAM, and business relationship with Apple (AAPL) over the sale of NAND memory chips are thought to be beneficial to Micron. With Apple having an adversarial relationship with Samsung over Google's (GOOG) Android, Micron could have DRAM and NAND opportunities with Apple, which is also supplied by Elpida.
I believe Micron is undervalued at its current price around $6 per share and that stock price will only grow after some period of time.
Micron reported fourth quarter results that showed revenues of $1.96 billion, down 9.6% when compared to third quarter revenues of $2.17 billion. It also fell way short of analysts expectations of $2.11 billion. Micron reported a net loss in the quarter of $243 million, or $0.24 per diluted share, almost coming in line with analysts estimates for a quarter loss of $0.23 per share. Full year revenues in 2012 fell by 6.2% to $8.2 billion.. Revenue from sales of DRAM products were 12% lower in fiscal 2012 compared to 2011 due to a 45% decrease in average selling price. Revenue from sales of NAND products were 14% higher in fiscal 2012 compared to fiscal 2011 due to its increased use in the shift toward mobile applications.
DRAM price declines experienced in 2011 drove Elpida into bankruptcy, and I don't see any catalyst for drastic DRAM industry growth , or sustainably high multitudes in the near future. Many DRAM producers have gone bankrupt over the last few decades, and I'm not optimistic about a recovery in PC demand in the shift toward mobile applications. Even Window 8 from Microsoft (MSFT) may not drive a major PC upgrade cycle, and I believe Microsoft faces serious challenges for failure to transit to the mobile devices sector earlier. As much as I like Micron as a trade, it has struggled for years due to the sluggishness of the PC market, losing money for several quarters straight. And its recent past may turn investors off, especially when compared to Semiconductor Manufacturing International (SMI), which has experienced decline of over 2% for the last five years. Micron also had a net loss of $320 million in the three months that ended May 31, compared with profit of $75 million a year earlier.
Even though I expect PCs to see some stabilization or decline at a less brisk pace, but it will take time before inventory will get cleaned up and prices rise. Things are so bad that Powerchip for instance is leaving the business. Sure, Micron, the world's second largest manufacturer of DRAM chips and one of the leading producers of NAND chips, could ride the storm. But it will first shift to smaller geometries, its manufacturing cost declining over the near future.
Since the August quarter concluded, NAND prices have increased over 20%. Sandisk (SNDK) recently reported strong third quarter results and a healthy outlook. But Apple, a potential customer of Micron, is buying less NAND in the fourth quarter than usual due to iPhone manufacturing bottleneck which may or may not lead to procurement in the first quarter of next year.
If Micron's attempt to buy Elpida is successful, it may increase its economies of scale and result in better productivity and more efficiency. Consolidation may tighten supply as the DRAM market will be dominated by Micron, Samsung, and SK Hynix. Micron may also double its output of DRAM chips and increase its presence in the consumer mobile market. It may become a key supplier of chips to Apple, and the partnership may lead to Micron's global rise. But the effect of the partnership will not manifest immediately. Besides Elpidas supplied NAND chips to Apple, yet it went bankrupt. It is not automatic Micron achieves profitability if it starts selling NAND to Apple. Growth in the consumer electronics field will remain strong, particularly in the area of smartphones and tablets. With the Elpida acquisition, Micron may position itself as a major supplier of chips to these devices. Use could spread to the automotive, medical device, and defense industries, and Micron could befit. Unfortunately, Micron has disappointed shareholders for a long time.
It will not be a surprised if the Elpida acquisition leads to Micron's resurgence. But there are simply too many investors with too much experience with Micron. They are aware that just as capacity comes out when memory pricing is too low, capacity is added too rapidly when pricing is high, precluding growth in corporate profit. Still, Micron has agreed to buy Taiwan-based Powerchip Technology's 24% stake in Rexchip Electronics for about $334 million. Micron will own 88% of Rexchip after the deal. Micron is well-positioned to benefit from a range of products and opportunities in the foreseeable future, but it has hit a rough patch recently. I believe its stock is a risky investment in the short-term, with huge upside potential if, and only if the Elpida acquisition becomes a reality.