Micron Technology (MU) is trying to shore up its deal to acquire bankrupt Japanese chipmaker Elpida. If the deal goes through, it would make Micron the world's second largest manufacturer of DRAM chips. These are chips that are used by personal computers. Micron is also a leading producer of NAND chips, which are used in mobile devices like smartphones and tablets. While Micron has struggled due to the sluggishness of the personal computing market, its position as a leader in the production of chips for mobile devices positions itself for good growth in the coming months.
Two big news items have dominated news surrounding Micron Technology. The first is the deal to acquire Elpida. This deal will increase the economies of scale for the company and will result in better productivity and more efficiency. There is some concern that the deal might not be approved by a bankruptcy court in Delaware, but the company is confident that the deal will go down even if they cannot be sure of the precise date. Not only will Micron emerge a more efficient company after the deal is finalized, but the industry itself should see prices rise which will help Micron's bottom line. DRAM makers were continuing to build up supply and supply capacity in an effort to gain market share; as a result there has not been much success in DRAM production as prices have fallen. Consolidation will tighten supply as the DRAM market will be dominated by Micron, Samsung (GM:SSNLF), and SK Hynix (OTC:HXSCL), a Korean based chip manufacturer. After Micron announced its acquisition plan, DRAM prices immediately rose on expectation of tightening supply. Good news for Micron. All three companies are beginning to focus more on mobile devices, particularly Samsung, now the leading manufacturer of Android-based smartphones.
By purchasing Elpida, Micron will double its output of DRAM chips. It will also increase its presence in the consumer mobile market, a market Micron has had limited involvement. With the deal, Micron becomes a key supplier of chips to Apple (AAPL). Given Apple's high rate of growth as one of the key players in the consumer mobile device market, this partnership will produce great results for Micron. It will stabilize the company's profit margin - something that has been lacking. Micron reported a $175 million loss and a $243 million loss the last two quarters respectively. The benefit to Micron cannot be overstated. Samsung had been Apple's main supplier and that partnership played no small part in Samsung's global rise. Expect similar results for Micron going forward.
The expansion into the mobile phone and tablet business will combine well with Micron's traditional strengths in networking and server memory. With the deal, Micron becomes a major player in Asia and can address the entire market in a much more efficient way.
As has been said, Micron has hit a rough patch recently, losing money for several quarters straight. But one thing to remember is that the semiconductor business is volatile, with almost all companies going through peaks and valleys. Consider that Semiconductor Manufacturing International (SMI) experienced revenue decline of over 2% for the last five years. SMI's operating margins are negative 14% compared to Micron's positive 8.6% last year. Micron has seen revenue grow almost 10% for the last decade, which compares nicely with Taiwan Semiconductor Manufacturing's (TSM) 11%. The industry is not for the faint of heart. But one thing to always keep in mind: the semiconductor business drives the innovation in the consumer and computing worlds. Micron is stepping up as a world player in this market and its recent past should not turn investors off, especially when compared to the records of SMI and TSM.
Growth in the consumer electronics field will remain strong, particularly in the area of smartphones and tablets. Micron has positioned itself to be a major supplier of chips to these devices. And as the technology increases, more areas for its use will open up - in automotive market, medical device industry, and defense products. Micron will be able to capitalize on these markets as they open up, providing even more opportunities for expansion and bottom-line growth.
The computing market will also provide growth going forward. As was said above, computing might be down now, but history has shown peaks and valleys, so expect a rise in the area coming soon. The popularity of cloud computing is driving the industry now. Microsoft (MSFT) is also pushing enterprise computing solutions and data centers. Micron has long been considered the expert in these areas and will capitalize as this market takes off.
Micron is currently trading at over $5 per share. TSM is trading at a P/E ratio over 17. As Micron returns to profitability, which it will this year, expect its P/E ratio to be between 15 and 20, which would shoot its stock up to $7.50 to $10 a share - a nice return for the smart investor. Right now, the market is valuing Micron at its absolute worst, and on top of that is assuming a worst case scenario. Hitting $20 by the end of next year is far from a fanciful prediction; Micron has a cash balance of over $2.5 billion with inflows of over $400 million the past quarter. It can withstand troubling times and come out well, which is exactly what is happening now. Micron is a good buy with tremendous upside.