When semiconductor maker Micron (NYSE:MU) recently announced its quarterly earnings, Wall Street was certainly disappointed — the company’s shares plunged 13% to $7.31.
Micron saw its revenue drop by 7% to $2.14 billion. Earnings fell to 7 cents a share from 92 cents a share a year earlier, however the company did take some writeoffs in the current quarter and there was a one-time gain from last year’s acquisition of Numonyx.
But there are investors who think that Micron represents a good value right now and that the company should be able to regain its footing. After all, the chip business is known for short-term volatility.
Who is right, the bulls or bears? Let’s take a look:
Pros
Global powerhouse. Micron focuses on developing memory technologies, like DRAM, NAND Flash and NOR Flash. These are for a wide variety of applications, which include networking, consumer products and mobile offerings.
Micron also has an extensive footprint of manufacturing facilities. They are located in the U.S., China, Israel, Italy, Japan, Malaysia, Singapore and the Philippines. The company also has a variety of joint ventures, such as with Intel (Nasdaq:INTC), to enhance its overall production.
Valuation. The stock price for Micron certainly looks cheap. The shares are trading at a mere 0.9 times book value, which is traditionally a low point.
Micron also continues to generate strong cash flows, which came to $589 million in the latest quarter. There is about $2.4 billion in the bank.
Corporate refresh. After the recession, capital budgets shrank. But companies are now starting to spend money on information technology to help gear up for growth and replace existing systems. This should be a nice boost for Micron.
Cons
PCs. On the consumer side, this market has been sluggish and this means less demand for memory chips. Basically, it looks like
Apple’s (Nasdaq:AAPL) iPad is taking away share. And the trend appears to be long term. In fact, a variety of other companies – like Hewlett-Packard (NYSE:HPQ) – are releasing tablets.
Mega lawsuit. Rambus (Nasdaq:RMBS) is pursuing $4.3 billion in a legal action against Micron, alleging that Micron and Hynix conspired to drive the company out of the memory business.
Of course, legal disputes are commonplace in the tech world. But, they are tough to predict and can weigh on stock prices.
Competition. Micron faces tough rivals, including companies like Samsung, Hynix or Elpida. As a result, there are often extreme pricing pressures on memory chips, and these could be exaggerated if there is a slowdown in the global economy.
Verdict
No doubt, Micron faces some headwinds. The PC market has little visibility and pricing is likely to remain weak.
Yet the fact remains that Micron is selling at a cheap price. And over time, there is likely to be some growth in the company and stronger margins, as it shifts the product mix to specialty chips (the Numonyx has been a big help).
As long as investors are willing to wait for a couple quarters, the pros outweigh the cons for those looking for a value play.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
