Micron (NASDAQ:MU) shares are down 8% the past two days for no apparent reason.
A week ago 8500 put contracts were traded, apparently in a single block. Perhaps that was the foundation for some hedge fund mischief of some complex form.
Micron has increased in price 100% in the past six months. Many holders are not holding with conviction.
The much repeated, but undocumented "softness" in PCs connects to Micron in whispers, and the near saturation in high-end smartphones could result in order cutbacks for Elpida.
What we do know about Micron:
Micron will complete the purchase of Elpida on July 31.
We know the DRAM memory market will grow approximately 30% in 2013.
We know that NAND flash memory will grow in 2013.
Elpida is said to have enough cash that Micron is effectively buying the company for no cash outlay, that is zero, nada dollars.
80% of Elpida's depreciation will be eliminated subsequent to the closing of the deal, allowing the company to earn as much as $1.25 per Micron share per year.
2 gigabit DRAM prices have risen in the spot market from $.82 on December 3, 2012 to $1.85 today, a 125% increase with contract prices following that trend a quarter or two behind.
We know that due to the decreased value of the yen, and the deal is denominated in yen, Micron will pay $500 million less for Elpida than originally negotiated. That will be reported as a one-time $.50 per share gain.
We know that Micron itself is now profitable and will add about $1.00 in earnings to the $1.25 of Elpida.
We know that Apple awarded Elpida massive orders for mobile DRAM that has made the company profitable even before the acquisition closes.
We know that the combined company including the price increases could produce as much as $16 billion in revenue when the acquisition is digested.
We know that Micron will host an analyst conference on the 8th of August, about a week after the closing. Combined numbers should be discussed which will end all potential for the "game playing" that we see today.
What if the memory shortage that lit DRAM prices on fire is not real? How would you tell? The increase in absolute prices doesn't tell the whole story.
Here we go, another boring story:
For decades, the memory business has doubled the bit density of DRAM by shrinking the feature size (process node) every 3-4 years. Every time this happens, the price of the highest density chip is priced at something less than twice the price of the previous chip, usually 85-90% of the price of two of the lower density chips.
The reason for this is that it only takes 50% more silicon area to make twice the DRAM bits. For example, a 2Gb chip is about 40 sq. mm, 1400 per wafer, $1.81 per chip, $2534 wafer revenue. A 4Gb chip is about 60 sq. mm, 950 per wafer, $3.59 per chip, $3410 per wafer. It doesn't take a genius to see that it is in the interest of the manufacturer to move customers to the higher density chip. As an inducement for the customer to move, and move quickly, the manufacturer will price the newer, denser 4Gb chip at 85-90% of the price of two 2Gb chips. So, a 4Gb chip that is priced at $3.23 will still produce $3069 per wafer or 21% more revenue than a 2Gb wafer. Even at a discount of 15%, the manufacturer will make a 15% premium by moving customers to the 4Gb chip as fast as possible.
It is because of this pricing mechanism that Micron and all memory companies continually project average selling prices PER BIT to decline.
As can be seen from the inSpectrum link above, DRAM pricing between 2Gb chips and 4Gb chips are at parity today. This condition only happens when the supply of DRAM is constrained. The same parity situation exists on contract pricing as well.
The same principle holds for NAND as well, but the pricing sites don't give up-to-date information without a premium membership.
Watch the relationship between the price of 2Gb and 4Gb chips. As long as they are at approximate parity, the "memory shortage" investment thesis is intact. If the 4Gb chip declines in price more than the 2Gb chip does, be careful.
From my viewpoint, the Micron investment thesis remains intact with a combined company capable of $16 billion in sales and $2.25 per share in GAAP earnings, and much more if the memory shortage gets more severe.
Disclosure: I am long MU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.