Shares of Micron Technology (MU) ended the week on a bad note. The manufacturer and marketer of semiconductor devices closed the day 3.5% lower after releasing a disappointing set of quarterly results.
Second quarter results
Micron saw its revenue fall 8% to $2.07 billion for the second quarter of its fiscal 2012. The company reported a net loss of $224 million or $0.23 per share vs. a net profit of $72 million in the same period last year. Analysts were expecting the company to report a loss of $0.19 per share on revenues of $2.02 billion.
Weaker selling prices for memory chips continue to put pressure on the profitability of the company. The company saw a 20% volume increase for its NAND Flash and DRAM products but revenues were down 1% compared to the first quarter as a result of lower pricing for memory devices.
Analysts are hopeful that margins could revive in the short term as the bankruptcy of Japanese Elpida could reduce output in the short term. They also observe that Micron might be one of the potential bidders for the assets of Elpida.
Valuation
Micron saw a strong recovery in 2010 after a disastrous 2008 and 2009, when the company saw revenues fall and was forced report massive losses. For the book year of 2011, which ended in September, it managed to slightly increase revenues, but profits fell 91% on the year, as lower memory prices hurt profitability.
For the first half of 2012 Micron reported revenues of $4.16 billion, on which it lost $411 million. The first half year figures indicate that 2012 is going to be a lost year for the company. Revenues are going to be lower than 2011, and the company will have to report a full year loss after two years of profitability.
The structural profitability problems of the company are depressing the valuation of Micron. The market values Micron at $8.3 billion which is a mere 1.0 times annual revenues. This compares to 2.1 times for SanDisk (SNDK) and 2.6 times for Intel (INTC). The valuation difference is entirely attributable to the mere 2% net margin that Micron reported for 2011, while competitors Intel and SanDisk reported a net margin of 21% and 19% respectively.
Investment thesis
Shares have fallen 17% over the last year, as it became apparent that revenues are going to fall in 2012 and the company will have to report a loss for the entire year. The fading worries about the European Sovereign debt crisis and a good sentiment across global equity markets supported a rebound in Micron's shares from lows of $5 in October to $8.40 at the moment.
I am not a buyer of Micron, as the lack of structural revenue growth and profitability will fail to provide shareholders will long term value. For the short term, I see little upside for a quick gain, as shares have almost doubled since the lows of October 2011.
