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A short-lived price spike in a new type of memory likely cushioned


(MU) - Get Micron Technology, Inc. Report

latest results in an otherwise tough memory market. But even with that help, the company is still expected to post its eighth straight quarter of financial losses when it delivers earnings after the close.

For now, analysts remain split on how much of a boost Micron got from the shortage of so-called DDR memory, which processes data twice as fast as the traditional SDRAM. Both chips provide memory to operate PC programs.

On average, Wall Street watchers expect the company to post revenue gains of 8% in its November quarter to $809 million, with a net per share loss of 23 cents. That would seem to jibe with management's guidance in September for a "typical to maybe slightly muted" outlook for the period.

But a few outlying bulls and bears are far off that mark. On the bearish side, Lehman Brothers' Dan Niles expects paltrier revenues of $735 million -- which would mark a sequential drop of 2% -- and a loss of 31 cents. His firm has done recent banking for Micron.

He points out that cheaper SDRAM continued to account for about half of production in the most recent quarter (though DDR will soon surpass it). Given that SDRAM prices stayed weak until early November, he expects the company will report that its overall average selling prices declined slightly from the prior quarter.

Price slides are hardly unusual for DRAM companies, especially in the current weak market. In the previous August quarter, Micron's average selling prices dove 30%.

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Niles also expects bit shipments to drop because of Micron's inventory reductions in the prior quarter.

Taking a far more upbeat view is Merrill Lynch's Joseph Osha, who thinks ASPs actually rose 5% in the quarter based on DDR strength. He predicts Micron will say revenue vaulted 27% sequentially, leading to a loss of only 7 cents a share. Merrill hasn't done recent banking for Micron.

What Goes Up?

Whatever the takeaway on the just-ended November quarter, the outlook for DDR in the quarter now under way isn't promising.

In early November, the price of DDR peaked at around $9 per 256 megabyte, up from about $5.50 at the end of August. But since then, the price has slumped downward again, courtesy of a supply-demand sucker punch. Supply has surged as DRAM vendors have ramped up production of DDR, and demand has ebbed as PC outfits have wrapped up their Christmas orders, says Nam Hyung Kim, senior memory analyst at iSuppli, a market research firm.

He predicts that in the first quarter of 2003, the price could fall as low as $5 per 256 Mb.

That effect is bound to hurt Micron in the short term, says Ben Lynch of Deutsche Bank, which has no banking relations with Micron. "We expect declining DRAM spot prices through the second quarter of 2003 to put pressure on DRAM stocks," he writes in a recent note.

Looking beyond that, Lynch can only muster the most backhanded of compliments. "The only positive for Micron currently is that it has underperformed DRAM peers by 30% to 40% over the last year and is trading close to its historic price-to-book trough," he writes.

But given the fundamentals, that's not cheap enough. Lynch, who has a "hold" rating on the stock, expects that Micron will probably stay in the red most of the time, at least through fiscal year 2004 (which ends in August of calendar year 2004). "While Micron remains among the best-managed and rational companies in the sector, we see no reason for owning DRAM stocks currently," he concludes.

Sanford Bernstein's Adam Parker, likewise no fan of the DRAM industry, has a similarly bearish view. "Brutal pricing pressure due to chronic overcapacity is a key reason for our long-term negative stance on the DRAM industry," he sums up in a note, adding that pricing has stayed nasty despite years of ongoing industry consolidation. "Long-term pricing pressure overrides short-term pricing spikes." Bernstein doesn't do investment banking.

Parker recommends steering clear of Micron even though its price has dropped from near $18 in early November to below $14. On the basis of Monday's close of $13.49, it's lost about a quarter of its value.