Micron: Elpida Deal May Trigger 40% Gain

May 30, 2012  |  about: MU

                              

It is really bad news for a company of Micron Technology's (MU)stature when you hear that one of its products, the DRAM, is on the way down due to low demand. Not to mention that it has just announced anew module of the product for release later this year (companies can thank the smart phone and tablet PC demand for the lesser need for huge HDDs and the sort) and was only saved by a company going bankrupt. However, Micron has much to gain from Elpida Memory's bankruptcy aside from taking out one of the more active competitors on the market (more on that in a few paragraphs).

So, how is Micron coping with one of its prime products going down the drain and becoming untenable within the next few quarters? Surprisingly well. One investment firm recently rated the stock as "outperform". Another firm even went as far as to give it a "buy" rating in its research report (having to do with Elpida). This does not seem to be the overall sentiment, as several analysts have had different opinions about this company, though. That could be your warning signal right there - several experts can't seem to agree on what exactly the stock is worth.

However, this flux for Micron does not seem to be the case for rival companies. Integrated Silicon Solution (ISSI) just had a "buy" ratingreaffirmed by another rating company. While you can't really take that to the bank, it is an affirmation that the company is doing something right, which is of course bad news for any other opponents in the market out there.

Another company that Micron might need to look out for is SanDisk (SNDK), a direct competitor in the memory products market. However, ifthis is any indication, SanDisk needs to improve its own position before it can worry about the other players in the field. If it has a problem with price determination, it is going to be in a worse flux as it keeps trying to fight invisible enemies and outbidding itself in the attempt to ensure that it can secure its niche in the market effectively. So no need to worry about it being a wrinkle for Micron's plans.

Of course, when you talk about computer parts and computing in general, you can't avoid talking about one of the biggest players on the block - Intel (INTC). In light of the recent financial crises that happened, the most common trend that people have is that they buy into gold or hold onto blue chip stocks. That is exactly what Intel is counting on, people investing into stable and dividend earning stocks like it during the times when the world seems very uncertain, which is obviously not very good for Micron again as the professionals still can't give a solid ranking on this company.

Another competitor that Micron needs to look out for is MoSys (MOSY).Why is this company one of the competitors that Micron needs to keep an eye on? Well, the general trend is that when a rival company decides to release a new product into the market, it is bad news since that product is going to be more powerful than what is currently available in the market - there really is no sense in giving the public a product that is weaker than the most commercially available device out there, right? So, that is another thing that Micron has to definitely watch out for.

If that is not enough bad news, Micron's decision to settle with Oracle America (ORCL) over an alleged conspiracy to jack DRAM prices up has had a negative effect on its Q2 statements, with a net loss of $58 million attributable to Micron's shareholders - definitely something that you do not want to hear if you have stock in the company.

However, remember that Elpida Memory bankruptcy news item that went into play in the first paragraph? This is the biggest silver lining in Micron's favor. How exactly is that useful? Well, it is in an advantageous position to buy Elpida and reports indicate that it is not something that is going to cost it a whole lot of money. Just how much of a boon is it for Micron to get Elpida? Well, Apple (AAPL) just decided to place massive chip orders with Elpida, and since Micron is in the best position to obtain the said company, interest in the company's stock jumped. This is probably the primary reason why analysts are high on Micron.

However, there is trouble brewing on the horizon. There is a report that bondholders of Elpida have rejected Micron's offer of $2.5 billion, currently on the table, asking other companies to step in. This has beencorroborated by another news source, which is amazing considering the fact that Elpida is so far in debt that companies might not be scrambling to obtain.

So, overall, if you have Micron in your portfolio, hold on to it until you hear conclusive news that it has lost Elpida for good, then maybe think about slowly getting out. If it's able to get in on Elpida, the outlook could be fantastic and you will want to get on this bandwagon as soon as you can.

The question remains if Micron would consider spending more on Elpida, if its offer continues to be rejected by Elpida holders. With its products perhaps less impressive than ever, I can't imagine a reason why Micron would not consider upping the offer. Of course, if it does not have the funds, that's understandable, but an investment into Elpida seems sage as long as its product has a demand. Right now, that's more than you can say for Micron's DRAM, and demand is the big ticket in this industry. The prospects for a buyout of Elpida are looking better than ever. If a deal is made, I think Micron stock will jump up to the $9 to $10 range. Micron is currently trading around $6.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.