One of the world's leading memory chip manufacturers Micron Technology (MU) has been performing quite well on the stock market, and has continuously been categorized in the most actively traded stocks and good buys. However, many investors would think that it would be better to get rid of it now and make a profit before its price comes plummeting down. The question is would it be coming down in the near future? Why or why not?
Micron over the past year and its current valuation
Micron's share price has increased by more than 100% over the past one year, from $6.18 on the August 31, 2012 to $13.18 on August 27, 2013, reaching a year high of $14.97 during August 2013.
Shareholders have been very happy with the stock, but investors keep wondering if it's the right time to take profits. Analysts might argue that technology stocks, and especially the ones related to memory products, tend to exhibit a cyclical behavior, and hence, like a majority of its counterparts, Micron stock might also be following the same cycle, and probably would be coming down after reaching its high points. However, what remains uncertain is whether the stock has reached its peak so far or whether there is still an uphill climb left for Micron Technology. Micron's stock is valued at 7.32x of its future earnings, which depicts that despite all apprehensions, the stock is still pretty fairly priced, meaning that it probably hasn't hit its peak yet.
Elpida - A promising addition to the Micron family
The recent acquisition of the bankrupt Japanese semiconductor chip manufacturer Elpida has positioned Micron strongly in the industry, especially the DRAM market, increasing its market share to a good 28%, beating Hynix having a 23% market share, second only to Samsung with a 33% market share. What makes the acquisition even better is the strength of Elpida in the DRAM market, which makes Micron a power boost in the DRAM market, and it could greatly benefit from the contract established between Apple and Elpida for its memory chips for the iPhone and iPad in 2011.
Even better, this existing contract could act as a base for future contracts between Micron and Apple for its DRAM. The new acquisition has expanded the chip manufacturer's production capacity as well as pricing power, pertaining to its greater production capacity and reach in the market, which enables it to be a price-maker instead of a price-follower in the future. This also tends to reduce the volatility of this stock since it makes the company more stable in the industry, where it does not take dictation in every aspect, but also generates rules of its own that could better suit the company and in turn, its investors.
Micron has reported a $142 million quarter-on-quarter increase in revenues in the third quarter this year, as well as an increase from a negative EPS of ($0.32) to ($0.04), which shows improvement, and hence adds to investor confidence. Moreover, the Elpida acquisition is expected to improve the cash position of the company, and investors and the company alike believe that the company would finally be able to distribute a dividend soon. The expectation of a possible dividend has also been a factor in the higher valuation of the stock, and hence, keeping the stock might be a good option for a lot of investors.
The growing mobile industry
Observing the growth in the mobile device market, Elpida's acquisition could prove to be "a right decision at the right time." All industries and markets contributing to the handheld device industry, or affected by the handheld device industry are by default expected to grow and make gains in the future, thanks to the growth in the mobile industry. DRAMs are an important component of all handheld devices, and thus are an important factor for the further growth of Micron. Elpida has further made the situation rosier, giving Micron an increased production capacity as well as better pricing power, making it a strong contender for selling DRAM chips to OEMs developing mobile devices. At present, Samsung rules the DRAM market, and Micron could take the second place easily.
Micron already has a head start in the mobile industry, and the Elpida acquisition has brought the deal with Apple with it, giving Micron an additional base when it comes to benefiting from the growing smartphone and tablet market. The key however, is constant responsiveness to the changing and evolving market, otherwise, a company could perish in the cut-throat competition prevailing in the industry just as easily as it could make its place - all with a single right or wrong move.
The flash memory market
Another trend seen in the memory market is a shift from permanent memory to temporary storage, where people tend to keep data for as long as it is needed, and discard it as soon as the need ceases. This favors temporary storage products such as flash memory, and consequently the DRAM market, which again is a catalyst that could greatly benefit Micron. Micron could also greatly benefit from further increasing its focus on NAND flash memory chips employed in mobile devices.
Considering all the factors mentioned above, Micron is still a good buy, and an even better one for those already owning the stock. Those who bought the stock a year back or even six months back could reap profits even today, but waiting to see how the company performs even further would be a wise decision. Over the past couple of months, Micron has not shown any extraordinary performance, which is actually the reason for the apprehension of investors. Recent developments with Micron would benefit Micron more in the longer run, thus making it less volatile and lesser prone to how a competitor adjusts its prices or supply in the market. Thus a downward trend in the company's stock has a lesser probability in the near future, and perhaps would somewhat enable it to 'dodge' the cyclical behavior that it has been going through in the past.
In the end it all comes to how much risk an investor would want to take, but in my opinion, waiting a little longer before selling the stock might add much more to what you have already earned.