When shares of memory maker Micron (Nasdaq:MU) go up, shares of Micron go down, over and over again. Like the broader consumer electronic device market, the recovery in memory demand is apparently always one or two more quarters away. Although I'm not all that interested in joining the fruitless guessing game as to when the memory market will rebound, I do believe that Micron shares trading in the mid-single-digits are interesting for investors with a medium-to-high risk tolerance.
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Better Revenue, Worse Margins for Fiscal Q3
Micron reported sequential revenue growth of 8% and annual growth of 1.5%, good for a nearly 10% beat relative to sell-side guesses. Growth was helped along by double-digit sequential growth in DRAM, as both volume and ASP improved. NAND memory saw a substantial deterioration in pricing that volume growth could not completely overcome.
Margins were not especially good. Gross margin was just below 11%, less than half of last year's level and slightly better sequentially. Operating income (or loss in this case) followed a similar trajectory - bad relative to last year, but a little better sequential.
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If there's good news here, it's that this is looking like a bottom, and Micron management did say that they believe prices have bottomed. Plenty of memory-using companies, such as Hewlett-Packard (NYSE:HPQ) and Dell (Nasdaq:DELL), have made similar comments, but skeptics and cynics should be forgiven if they feel as though they've heard that before.
Elpida Not a Done Deal
At this point, it looks as though Micron will be the winning bidder for bankrupt Elpida, with a bid of around $2.5 billion. While this deal could still fall apart, the odds would seem to favor it going through. If it does, Micron is going to vault to the #2 spot in the DRAM market (behind Samsung, ahead of Hynix). The deal would also go towards helping the company build its business with Apple (Nasdaq:AAPL) and further diversify away from computers and peripherals in favor of markets like mobile devices.
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Always in Motion Is the Memory Market
Micron has already gone a long way towards diversifying itself over the past few years. Where PCs and consumer devices were once half of the business, now they're about 30% and mobile, networking/storage, industrial and SSD are all bigger parts of the pie. At the same time, the company has seen Samsung become a much bigger fish in the pond - doubling its DRAM share over the past five years.
Given recent developments, it would seem that market pressures ought to favor the eventual creation of an oligopoly in these markets. Fab equipment cost intensity is rising and it's getting harder for smaller commodity players to stay in the game. At the same time, demand for new memory applications like solid-state hard drives and enterprise storage (like that sold by Fusion IO (NYSE:FIO)) means that the demand picture continues to evolve.
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The Bottom Line
Trying to value an exceptionally cyclical business like Micron is about as fruitful as trying to nail Jello to a tree. A discounted cash flow model is very nearly worthless, and other methodologies like EV/EBTIDA really aren't much better. For all of its flaws, price-to-tangible book does at least appear to give some useful directional signals, and by that metric, Micron seems cheap today. With Micron shares in the mid-single-digits, fair value (on a tangible book basis) above $10 and a lot of data pointing to a bottom in the cycle (albeit a lengthy one), these shares could appeal to aggressive risk-tolerant investors.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.