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Chris Lau, Kapitall: Will buying Elpida help Micron stay ahead of its competitors in a declining PC market?
Since buying semiconductor and memory producer Elpida to increase capacity,
Micron (MU) shares are up more than two-fold. Investors who missed out on the rally will be comforted knowing strong demand and rising prices for memory are hear to stay. Does this suggest that there could be more upside to Micron shares?
Memory prices are high
Micron bought Elpida so that it could make 300mm DRAM. The acquisition brought in intellectual property, R&D, and could help Micron find synergies by merging with its own facilities. As prices for memory have risen, Elpida could support better earnings. More recently, memory prices were elevated again after a fire at rival manufacturer
SK Hynix in China back in September constrained supply.
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The Hynix facility is not expected to be operational until mid-January 2014 at the earliest. Even then, the facility will need time before producing decent yield and quality.
With a competitor struggling and memory prices rising, investors could expect profit margins to increase considerably when Micron reports in January. Gross margin was around 30% last quarter, but the sharply higher DRAM and NAND prices should be reflected in results. Investors should also keep an eye on
SanDisk (SNDK) - another company that could benefit. It is valued at a forward P/E of 12, compared to 11 for Micron.
Click on the interactive chart to view data over time.Micron finds powerful friends
Micron is being held by fund managers that include
Seth Klarman and
David Einhorn. And their bullish position could scare away short sellers. Short float was around 11%.
Weak demand for PCs in the final quarter of this year will mean less demand for memory, however higher prices could more than offset lower sales in this segment. In 2014, Microsoft’s revamp of Windows 8 could moderate the decline in PC sales. Even though Micron is boosting sales in the mobile segment, which includes tablets and smartphones, any stabilization in the PC market would be welcome.