Micron Looking Ahead to 2012 After Rough 2011

Micron Technology (NASDAQ:MU) continues to have a tough year, missing earnings estimates and being hit hard by the slowdown in PC sales. The stock price is down 50% from its 2011 highs, but is now about in line with the Trefis price estimate of $5.74. The company did not fully take advantage of the explosion in tablet devices and is now playing catch-up to huge competitors such as Samsung and Intel (NASDAQ:INTC). Micron builds and markets semiconductors sold around the world. It primarily manufactures dynamic random access memory (DRAM) chips used in personal computers and mobile devices, networking and server equipment. The company also makes NAND Flash memory semiconductors.

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Continuous Innovation Key to the Health of the Business

Micron has plenty of cash on its balance sheet at $2.4 billion which leaves it a little room for error. However, the company is obligated to continue investing due to the industry’s continued rapid transformation. If you go by Moore’s Law in the semiconductor segment which says that the power of semiconductors will double every two years, Micron has its work cut out. Though a general observation, this law has been roughly accurate ever since the 1970’s when it was first proclaimed. Moreover it dramatically affects the price of memory.

In fact, we predict that NAND chips will decrease in price from $1.55 per gigabyte today to about 4 cents at the end of the forecast period. If Micron’s technology does not roughly keep pace then it will find itself with rapidly shrinking sales figures.

Follow the Product Cycle

Micron’s business and stock tend to swing wildly with the product cycle. When the company produces a hit product, the stock outperforms and vice versa. In 2011, after missing the tablet boom the company produced a miserly 2% net profit margin along with a negative cash flow of $753 million dollars. The company recently announced a new chip for servers that allows for 50% higher memory capacity. If this or other products succeed, the stock price could leap back to a level seen earlier in the year when it was double the present price. ^[1]

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1. Micron Debuts Industry’s Broadest Portfolio for Load Reduction Modules, Boosting DRAM Performance and Memory Capacity for Enterprise Server Applications, Company Release [↩]