Micron Likely To Trend Upward In 2012

| About: Micron Technology (MU)
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Micron (MU) just settled with Oracle (ORCL), ending a two-year case focused on antitrust and unfair competition allegations. This has put the DRAM memory chipmaker back into the sight lines of investors, some expecting to see nothing but improvement from Micron next quarter. The $58 million settlement increases second-quarter losses, and the hope is that nothing could bring a drop like that again. Add to that the fact that shares of Micron are already up by more than 30% this year, and I can see why investors are taking notice.

Micron investors are mixed, but the trend seems to be upward for now and analysts are projecting pretty good gains over the coming year. The stock is currently trading just above $8, with projections putting it at $12 within the next 12 months. That would be a nice 50% gain, something not unreasonable to expect from the makers of products recently accused of being unfair to competitors. In addition, Micron is looking to diversify its product line while upgrading current offerings.

But there are downsides to this company that cannot be ignored. This quarter has been pretty dismal for tech stocks in general, and compared to some others Micron is not the worst investment. However, the EPS estimate from less optimistic sources is just $0.38 over the next quarter, at just under $10 per share. Investors have been losing consistently for the past six months, so it's no surprise -- nor is it unwarranted -- that many investors are cautious about Micron.

More optimistic investors are quick to point out that one of Micron's biggest rivals, Japanese company Elpida Memory, filed for bankruptcy at the end of February. That will hopefully relieve some pressure on the market, which has been flooded with DRAM technology in recent months. Oversupply hurts everyone, but Micron managed to weather the storm and now stands to benefit. Any gains wouldn't have registered this quarter, but the future looks brighter with one less fish in the pond.

The last quarter saw drops in prices, a short-term strategy that is meant to bring in just that extra bit of revenue. Overall, bottom-line losses end up in an uncomfortable spot no matter how many fire sales a company can pull off in desperate times. The NOR flash market is just as flooded as the DRAM market, and with low prices came the uncomfortable quarterly statement earlier this month.

Rivals in the flash market fared slightly better, but it's likely that this is not over yet. SanDisk (SNDK) and OCZ Technology (OCZ) lost 3.3%, compared to Micron Tech's 4% loss after the reports of a quick and cheap sales quarter from Micron's flash department. Micron has the advantage with a very strong balance sheet, and it has experienced this kind of tension before without crumbling. In fact, it's likely that the company will put some of its capital to work by investing in the cheap remains of competitors that don't make it. Bidding is currently under way for Elpida and will conclude in May. This kind of capital investment could mean a speed-up in production of the items Micron is confident will sell, and the company has even hired Goldman Sachs to help broker the bid.

Competition Or Partner?

Micron is not the biggest player in the flash chip game. That distinction belongs to Intel (INTC), currently trading at just above $28 per share. Intel is no longer in the DRAM game, but it is also bidding for the Elpida leftovers and could move back into a competitive position if it is successful and decides to continue the DRAM production.

Intel does have a vested interest in playing nice with Micron, as it currently makes "flash memory products in a joint venture with Micron" rather than producing on its own. That may or may not be enough to keep the company from using its size and strength to muscle Micron out of some of its market share, but it seems to be an unlikely threat at this point in the bidding.

Long Micron Could Pay Off

I'm betting on a better-than-expected showing from Micron and I urge investors to resist selling until they can make a few bucks on each share. This is no short-term investment, so don't put in cash that you might need later this year. But with Elpida out, along with roughly 12% market share in DRAM chips, Micron is poised to benefit -- especially if it secures what is left of Elpida.

And DRAM chips are not the whole story. Fortunately for Micron, its NAND flash chips are what tablet and smartphone makers rely on. This is not a dying or trend-driven market. People are more and more interested in gadgets that are becoming more and more practical as they are developed and tested by the masses. To top it all off, Micron's deal with Intel means it is not really competing. And as Intel sells off its factory share to Micron, the setup gives Micron a guaranteed $300 million in sales. Of course, along with full ownership of the factories come additional benefits, such as potential capacity increases of up to 30%.

Micron is not going away and it is certainly capable of weathering the type of fire sale storms that we've seen in the last quarter. By maintaining a decent, respectable balance sheet and letting its competitors do themselves in, Micron is likely to trend upward over the coming year, with gains estimated at $2 to $4 per share on the optimistic end of things. Sitting on some Micron stock might feel especially good this time next year, since cautious investors seem to be wary of the recent tech slump. But when is a better time to buy than when prices are low?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.