Micron

(MU) - Get Report

looks set to miss Wall Street estimates for its fiscal fourth quarter by a mile, due to a continued slide in the price of memory chips.

That's the conclusion of David Einhorn, manager of the New York-based Greenlight Capital hedge fund. (He declined to reveal his fund's position, if any, in Micron.) Einhorn thinks Mircon's fourth-quarter loss could be nearly twice the 28-cent loss that analysts expect. And he estimates that revenue could be more than a third lower than the $740 million forecast.

"While earnings estimates have come down a lot for Micron, they seem to have a lot further to fall," says Einhorn. A Micron spokesman declined to comment on fourth-quarter earnings or Einhorn's numbers.

The market doesn't appear to be pricing in a massive miss: Boise, Idaho-based Micron's stock is flat since the beginning of June, while the Nasdaq 100 index has swooned 20% since then. What's more, the stock isn't cheap. It trades at 145 times forecast 2002 earnings of 26 cents a share. And its market worth of $22 billion is over 10 times the $2 billion in annual revenue that Micron appears able to produce over coming quarters. "This seems like the sort of valuation you had when the Nasdaq was above 5000," Einhorn says.

Why care what Einhorn says? Simple: His approach is buttressed by backtesting. Here's how he arrives at his numbers.

Evidently, much can be deduced from memory chip prices. According to Einhorn, the average daily spot price of 128-megabyte SDRAM fell from $4.05 in Micron's fiscal third quarter to $1.88 in the fourth, which ended Friday. This spot price serves as a useful proxy for the price of the various memory chips that Micron sells, Einhorn argues.

On its own, what would that drop do to sales? Take them from $818 million in the third quarter to $384 million. But let's assume a 20% increase in units sold at the new lower price and you get revenue of around $460 million.

Did this relationship between prices and revenue hold up in the second and third quarters? Seems so. Prices plunged by 30% from around $5.75 in the second quarter to $4.05 in the third; revenue dropped 23% sequentially. The smaller decline in revenue can be explained by a 10% increase in units shipped.

Next, earnings. Einhorn is assuming that expenses (excluding the third-quarter inventory writedown) will stay flat at around $1.07 billion, even as units shipped rise by 20%. This would produce an operating loss of around $550 million. Adding in net interest income of $35 million gives a pretax loss of $515 million. Then, somewhat generously, Einhorn applies a 40% tax credit to that loss -- remember, the company's losing money -- to produce an approximate net loss of $310 million. Divide that by 600 million shares and you get a per-share loss of 52 cents, way above what analysts expect.

If Einhorn is missing anything, please contact

Detox to tell us what. But, as it stands, Micron's fourth quarter could be ugly. And don't be surprised if the company decides to warn investors before the release of the earnings report, scheduled for the third week of September.

Know any companies that the market may be misvaluing? Detox would like to hear about them. Please send all feedback to

peavis@thestreet.com.

In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.