How High Can Micron Fly?

NEW YORK ( TheStreet) -- The last time I talked about Micron ( MU), I argued its recent stock performance versus operational performance didn't jibe. I didn't believe Micron's management was getting the credit that it deserves.

The management team had remained a mystery despite the fact that the company's stock had doubled over the past six months -- posting gains of 150% since bottoming out at $5.16 last October. They had overcome the gloom seen when Micron's flash memory business was under pressure from the likes of SanDisk ( SNDK) and Applied Materials ( AMAT).

Plus, it didn't help that the personal computer market, which Micron relied upon to further its DRAM (dynamic random access memory) business, was on the decline. This is while the overall memory chip industry, which has become commoditized, began posting weak margins due to low average selling prices, or ASPs. Amid all of this turmoil, Micron managed to keep things together.

With such a strong recent track record, I recommended the stock ahead of the company's third-quarter earnings report. Investors who listened to me were risking some pretty significant gains by holding. But it's proven to be a excellent bet as Micron didn't disappoint. Revenue climbed 7% year over year and 12% sequentially.

The company's NAND business, which is a non-volatile storage technology found in devices like MP3 players, grew 7% sequentially due to an 8% improvement in ASPs. This is encouraging, especially given that 60% of the company's NAND shipments support the growing demand for global SSDs, or solid state drives, the storage technology that is used in mobile devices.

Investors have to be encouraged by this growing trend. I've always believed that Micron's long-term value was being discounted on the basis of its NAND position. This, too, is now proven true, given the improved margins that the company is now enjoying due to the continued rise of smartphone and tablet shipments.

So far, in terms of Micron's NAND technology, there is no evidence to suggest there will be a decline in coming quarters. Micron's management seems to agree. The company has begun to migrate a considerable portion of its DRAM capacity in Singapore to increase its NAND output. In other words, Micron's profits should improve in the coming quarters due to higher NAND production and better margins.

Speaking of which, I also don't believe that management has received the credit deserved for navigating the weak ASP environment the way that it has. This quarter was no different. Cost-per-bit for both DRAM and NAND were down sequentially by 5% and 1%, respectively. This contributed to better gross margin, which advanced by more than 13% year over year and by more than 6% sequentially.

Even more impressive, though, is that this level of fiscal awareness by management has helped the company reverse a year-ago loss to $43 million in profits. Remarkably, even with added pressures from SanDisk and Samsung, I don't expect that this profit trend will end soon.

In my recent article, these questions (among others) were my biggest sources of concern. Regarding Micron's competitive position, I said:

"It will be also interesting to hear what management says about the progress of memory business and previous diversification plans. With competition gaining ground, while ASPs are falling, I've argued that Micron should seek stronger growth opportunities in other end-markets such as servers and mobile.

"In that regard, new developments regarding the completed acquisition for bankrupt chipmaker, Elpida, should give investors a clearer sense of how management plans to move the combined companies forward, especially since Elpida was expected to give Micron some leverage with Apple (AAPL)."

Micron's management has answered these calls. Not only has the company shown a strategic shift to higher growth markets like network enterprise, server and mobile, but management has indicated that the acquisition of Elipida will likely close within the next quarter.

As noted above, given the fact that Apple uses roughly 80% of Elipida's mDRAM capacity, Micron is looking more and more appealing each quarter, especially with the strong market demand for mDRAM.

What's more, with improved cash flow and margin expansion, this stock has plenty more room to fly. I'm not suggesting that there are no longer risks here. But the potential rewards far outweigh any downside potential.

Micron's still a buy and I'm sticking with my $15 price target for the second half of the year.

At the time of publication, the author was long AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.