As someone who has almost always had a semiconductor stock in his portfolio, I can tell you that you have to a have a loose screw or two to like this sector. But the memory chip space is a completely different wing of the semiconductor asylum, one where the peak-to-trough cyclicality is truly impressive and where long-term economic returns are difficult to earn.
That has led to a pretty “challenged” existence for Micron (NYSE:MU), and a stock that has been all over the map. With the industry consolidating down to just four major suppliers, though, the thought now is that the players will operate on a more rational basis and allow each other to actually book some respectable earnings and cash flow. While I think Micron's shares have room left to run on investor enthusiasm, it's tough to outline a fundamental case where the stock is significantly undervalued for the long term.
Conditions Continue To Improve
With memory chip supply a great deal more rational recently, Micron is continuing to enjoy significantly improving financials.
Revenue rose almost 12% from the prior quarter (and rose 7% from last year's level). NAND revenue improved 7% sequentially, with roughly flat volume growth and an ASP improvement of 8%, while DRAM revenue jumped 23% on 6% volume (bit) growth and 16% higher pricing. NOR was basically flat for the quarter. 
With strong pricing and improving volume, Micron is seeing better utilization and much better margins. Cost-per-bit was down 1% sequentially for NAND and 5% for DRAM, helping gross margin rise more than six points from the fiscal second quarter and more than 13 points from the year-ago quarter. This is also flowing down to the operating line, where the company reversed year-ago and quarter-ago losses and logged an operating margin in excess of 6%.

SEE: A Look At Corporate Profit Margins
Elpida Will Change A Lot
It has taken a while to navigate all of the legal processes, but it looks like Micron is on target to close the Elpida acquisition in the next quarter. Bringing this bankrupt Japanese memory maker into Micron will not only significantly improve the company's capacity, but it will particularly add to Micron's mDRAM capacity. mDRAM is currently a small part of Micron's revenue, but a growing section of the market and Apple (Nasdaq:AAPL) already uses about 80% of Elpida's mDRAM capacity.
Those aren't the only benefits to the deal. With the deal done, there will effectively be just three DRAM suppliers, and that should encourage more rational competition and investment decisions. Micron may also benefit from economic policies, as the movements in the yen have made the cost basis of Elpida much more interesting since the entire transaction process began.
The Only Constant Is Change
Micron has been seeing some positive trends in its capex – the company's capex investment per wafer has recently been running around $400, half the rate back in 2005. Keep in mind, though, that although the trend has been pointing to lower capex-per-wafer, there have been a lot of ups and downs along that trend line. What's more, while working with Intel (Nasdaq:INTC) on 3D NAND should give Micron access to high-end technology at a reasonable price, transitions in this sector have always been turbulent.
SEE: 3 ETFs To Play The Semiconductor Rally

Moreover, just because the industry is playing nice today, I won't assume there has been a permanent change. Hynix and SanDisk (Nasdaq:SNDK) have good reason to be rational, but Samsung operates a very different type of business and what's rational for Hynix and SanDisk in NAND may not seem as rational to Samsung (and vice versa).
The Bottom Line
If you believe you can accurately model Micron's cash flows beyond the next year or two, I salute you. Given the extreme year-to-year volatility, I don't really put much faith in that process for this stock. That leaves investors with less appealing metrics like EV/EBTIDA, EV/sales, and tangible book value. By those metrics Micron looks pretty well-valued, although not yet at peak prices. All told, investor enthusiasm could still take these shares into the high teens without breaking any records. That's appealing potential from today's price, but these shares carry above average risk and are really only suitable for the more stout-hearted investor.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Stock Analysis

    Jana Partners: An Activist Investor Analysis

    Learn about Jana Partners, a hedge fund founded by Barry Rosenstein. Read about new positions in ConAgra and Qualcomm the fund took in 2015.
  6. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  7. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  8. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  9. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  10. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center