Micron's Flash Sits Home for the Holidays

The deal was supposed to give Micron(MU Quote) a direct link to consumers.

By subsuming Lexar Media in an $850 million merger six months ago, Micron acquired one of the top two brands in the market for flash cards. It also got an established retail distribution network -- just what Micron needed as its factories began producing flash memory chips.

But now, as the holiday sales season gets into full swing, Lexar looks like the ghost of Christmas past.

Rather than taking Lexar's retail foundation to the next level, Micron appears to be letting its new property sit idle.

Lexar's flash media cards and drives, which store data in everything from digital cameras to cell phones, play second fiddle to competing products from SanDisk(SNDK Quote) on many store shelves. And players like Kingston Technology and PNY Technologies are increasingly boosting their retail presence.

For Boise, Idaho-based Micron, which is diversifying from the commodity DRAM business, Lexar's muted holiday presence underscores the challenges of expanding into the fast-growing, but highly competitive, flash market.

Investors will get their first peek at Lexar's performance under the Micron flag on Thursday when Micron reports its fiscal first-quarter financial results, which will for the first time include contributions from Lexar.

On Tuesday, WR Hambrecht analyst Daniel Amir downgraded Micron from a buy to a hold, citing short-term concerns about the Lexar business, among other things.

"We believe the Lexar Media business is currently negatively impacting Micron's NAND business, as our channel checks indicate the company is experiencing a challenging pricing environment this quarter that is likely to result in lower than expected gross margin," Amir wrote in note.

Shares of the chipmaker closed Tuesday's regular session off 18 cents to $13.35 Tuesday.

A recent scan of online electronic sites such as Frys.com and Bestbuy.com showed Lexar's products solidly in the minority in the catalog of flash memory products. Circuitcity.com had 62 SanDisk products available -- not including MP3 players -- vs. four for Lexar.