Semiconductor stock Micron (NASDAQ:MU) is tough to get a read on. Between the evolving technology industry and the complex operations of the company itself, there’s a lot at play.
Of course, that doesn’t scare off investors. Micron stock regularly is near the top when it comes to volume, with a three-month average of roughly 30 million MU shares traded daily.
But just because everyone is trading Micron doesn’t mean you should — especially if you’re a long-term investor. The stock is a risky play best left to the day traders.
In terms of pure semiconductor supplying, Micron is ninth in market share — 2.9% compared to industry leader Intel’s (NASDAQ:INTC) 15.9%. Not paltry, considering how many competitors there are, but not dominant.
A more important (and muddier) picture is Micron’s legacy business — DRAM, or computer memory. The company is a bigger player at fourth (12.1%), but Micron — as well as South Korea-based Hynix (21.5%) and Japan-based Elpida (12.1%) — lost varying levels of ground against Samsung (PINK:SSNLF), which gobbled up 45% of the DRAM market as of Q3 2011, reported in December.
DRAM prices dropped significantly across 2011, and Micron’s gross margins were subsequently laid to waste. There’s at least some reason to be positive, though — Barclays recently upgraded Micron and brought its target on MU shares up a buck to $9 per share, expecting higher DRAM prices and PC sales in the second half of this year.
However, the stock performance since 2009 tells you there are serious challenges facing this company. Shares of Micron are down about 40% from their 2011 peak of almost $12 in February.
Micron’s prospects look slightly better these days, so some folks are taking notice. MU is making strides in the NAND memory field, which the company has expanded to about 50% its business. Hiding out in Micron’s most recent earnings report — a mostly gloomy document showing flat DRAM sales and disappointing EPS — was 6% growth in its NAND business. However, even there, it holds just 11% market share, well behind Samsung and Toshiba.
There’s just no getting a good read on Micron’s long-term direction. And given the small market share in its DRAM business and the recent drop in margins, the status quo isn’t very inspiring.
Micron’s earnings have headed downward for more than a year. MU has steadily gone from EPS of 15 cents back in the first quarter of FY11 down to a 19-cent loss in the most recent quarter. Clearly bad. Analysts estimate a loss of 18 cents in the current quarter. Oh boy. And a loss of 34 cents for the current fiscal quarter. Yikes.
Some buy-and-holders might be enticed by fiscal 2013 numbers. It’s popsicles and sunshine, with the company expected to rocket into the black at 42 cents per share! But fiscal 2013 is a long time to wait.
Even more damning is Micron’s valuation. Similar companies in the sector are trading for an average of 13 times forward earnings. Even banking on that long-term forecast — which is a sketchy proposition on Wall Street — you’re looking at shares of MU trading around $5.46. Today’s value is above $7. Even if you grant Micron a charitable P/E of 20, you only squeak out an 8% gain. With no dividend.
That last point is especially bothersome. On what’s essentially a gamble at this point, there’s no supporting income while you wait for the roulette wheel to stop spinning.
Micron might very well eventually reward you in the future with tangible gains, and could prove these forecasts wrong with tremendous growth nobody saw coming. But you can say that about plenty of stocks.
In the meantime, you’d be better off throwing your money at something slightly less risky with more upside.
Kyle Woodley is the Assistant Editor of InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.