Micron Offers Subtle Flash Play

These results came as Micron experienced strong demand across its entire product platform. Flash sales were up fivefold on a sequential basis and DRAM prices increased 3% from the prior quarter with unit sales up 10%, leading to 15% growth in DRAM sales. Sales of its CMOS sensors, which are used in digital cameras and camera phones, saw sales ramp 40% sequentially.

With Apple (AAPL Quote) and Dell(DELL Quote) saying good things about PC demand of late, and Samsung, LG, Motorola (MOT Quote) and Nokia(NOK Quote) all positive on cell-phone handset volumes in recent earnings reports, Micron's business segments should continue to experience broad strength that will drive more earnings growth at the company.

Micron's current valuation does not include the potential for continued earnings growth, margin improvements or a deal with Intel. While the Street is modeling for 30 cents to 40 cents EPS in fiscal 2006, if Micron's recent strength continues the company could earn substantially more than these forecasts.

Micron's DRAM business could actually get a lift from strong demand for NAND flash. That's because the company is dependent on firm DRAM pricing for the brunt of its earnings results, and the recent surge in demand for NAND flash has also driven investment money away from DRAM capacity in favor of bringing new NAND flash supply to market. With less capital being directed toward DRAM production, supply remains constrained relative to historical patterns.

One last point of interest for speculative investors, which came from a telephone conversation I had with American Technologies' Freedman, is that Apple recently terminated its highly publicized flash memory deal with Samsung. This means Apple is sitting on a few billion dollars it needs to spend to secure flash supplies for its white-hot iPod nano and other flash-based products that could come to market. Given that Intel recently struck a deal with Apple, there is speculation that a Micron/Intel venture could open up the Apple door to Micron.

Micron is clearly not the "best of breed" in the semiconductor space. That title belongs to Intel and Texas Instruments(TXN Quote). However, it will be hard for investors to ignore Micron should it report similarly strong fiscal first-quarter earnings at the end of this year. And the current risk/reward appears stacked in favor of a long position. I think the stock's recent price of $12.61 is an attractive entry point for risk-tolerant investors.

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