This column was originally published on RealMoney on Oct. 25 at 1:34 p.m. EDT. It's being republished as a bonus for readers.

Micron Technology ( MU) seems to be at the bottom of most investors' lists when it comes to ways of playing strong demand for memory. However, Micron's strong September fiscal fourth-quarter earnings report and a potential deal with Intel ( INTC) could move Micron to the front of the pack in the coming quarters.

Let's start with the Intel angle. According to American Technology Research analyst Doug Freedman, Intel has been exhibiting its Robson "Instant On" technology recently. A computer with "Instant On" technology will boot up almost instantaneously using less power, which makes it attractive for use in laptops and other mobile devices.

In the past, Robson was based on a form of flash called NOR, which is common in cell phones. But more recently, Intel has been showcasing a NAND-based version of Robson, and the first version of "Instant On" could show up on the market with Microsoft's ( MSFT) Vista Office operating system.

This decision to move toward NAND flash is potentially significant for Micron as it is one of two companies with an inside track to win Intel's NAND flash business. Intel manufactures NOR flash, not NAND flash. So rather than building new processes, Intel will likely opt to buy existing fabs from an outside vendor like Micron. The cost savings and power improvements provided from NAND make this economical for Intel.

Micron and Toshiba are the two companies most likely to partner with Intel because both companies have favorable patent situations that would limit Intel's royalty exposure. (Royalties trigger according to fairly opaque patent rules.) And Intel has about $750 million, or 8%, equity interest in Micron via two investment funds Intel runs. Therefore, Intel has an interest in doing business with Micron, so I give it a slight edge over Toshiba in the handicapping.

Opportunity Based in Current Reality

But even without an Intel deal, Micron's business has been booming and is supportive of a higher share price. In its fourth-quarter earnings report on Sept. 29, Micron reported revenue of $1.19 billion and EPS of 7 cents. This marked a stark improvement from Micron's 20-cent loss in its fiscal third quarter, and revenue was up an impressive 19% on a sequential basis. In addition, strong demand for its memory products pushed gross margin up to 22.4% while the Street had been modeling for a sub-20% margin.

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) and Dell ( DELL) saying good things about PC demand of late, and Samsung, LG, Motorola ( MOT) and Nokia ( NOK) 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). 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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William Gabrielski is a research associate at In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski welcomes your feedback; click here to send him an email.

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