TECH WORLD: MU—Time to Dip Into Chips? By Frederic Ruffy, Optionetics.com 7/10/2003 3:30:00 PM
Shares of chipmaker Micron Technology (MU) fell Thursday on news that Texas Instruments (TXN) sold 24.7 million of the company’s shares. The stock fell 52 cents, or 3.6%, to $13.88. Some investors may have used the news of the Texas Instrument’s sale as a catalyst to book profits after MU’s five-month 100% surge. Others may be growing uneasier about the company’s prospects given the ongoing weakness in chip prices. Going forward, whether investors continue to sell shares, or decide to use the recent decline as a buying opportunity, could hold important implications because Micron is often viewed as a barometer for the semiconductor sector.
Micron Technology manufactures and markets dynamic random access memory chips [DRAMs], fast static random access memory chips [SRAMs], Flash Memory and other semiconductor components. Approximately 80% of the company’s sales of semiconductor products for 2002 were to the computer market. Based in the unlikely place of Boise, Idaho, Micron Technology employs almost 19,000 workers and had sales of $2.6 billion last year. The stock, which is a component of the S&P 500 Index ($SPX), is popular among portfolio managers, mutual funds, and other institutions. In fact, institutional investors control more than 80% of Micron shares today.
Through the years, Micron’s mainstay products—DRAM chips—have become actively traded in the spot market like commodities. DRAM chips are the most common type of semiconductor memory chips and are used in devices like computers, MP3 players, and digital cameras. As the demand for semiconductors increases, the spot price tends to rise. On the other hand, when demand for semiconductors is poor, DRAM prices fall. Therefore, some investors and analysts monitor DRAM prices in the spot market in order to better understand trends in the semiconductor sector. In addition, since Micron’s profits are directly tied to the price of DRAM chips, MU is sometimes considered a bellwether for the chip sector.
During the past several years, Micron Technology shares have performed poorly. Sluggish demand for PCs caused by a global economic downturn that drove down both business and consumer spending created a glut of semiconductor chips. After peaking in the late-1990s, DRAM prices collapsed and never fully recovered. The average selling price for 256 megabit double data rate [DDR] DRAM averaged $5.30 in the second quarter, and that was down from $7 and $8 for similar chips in the year ago period. In addition, according to a recent column in Barron’s Online (“Cashing in the Chips,” by Eric Savitz, June 30, 2003),
But, says [Sanford C.] Bernstein’s [analyst Adam] Parker, there's still a big problem: The economics of the DRAM industry stink. Excess supply will prevent Micron from gaining any lasting pricing power, and DRAMs aren’t going to gain a bigger piece of a PC’s bill of materials. Intel's recent investment of $100 million in the Japanese DRAM venture Elpida, says Parker, ensures that DRAM supply remains plentiful. That cleverly ensures that computer makers can spend more on Intel microprocessors.
Despite ongoing weakness in DRAM prices, Micron’s shares continue to climb higher. In fact, some analysts remain bullish on the stock. Thursday, a UBS Warburg raised its rating on the stock from “neutral” to “buy”. The likelihood of improved pricing for DRAM chips in the second half of 2003 was one reason for the upgrade. In addition, investors appear to be speculating that a recovery in the chip sector is close at hand. Shares of Micron Technology have risen from under $7.00 a share in February of this year to its current level of $13.88 a share. As we can see from the chart (below), the gains have helped push MU above both its 50-day and 200-day moving averages.
Going forward, the fate of MU may well rest on an improvement in DRAM prices. While some analysts expect a rebound in the second half of the year, consensus estimates are for Micron Technology to lose $2.05 a share in 2003 and .54 cents in 2004. Therefore, although the stock is heading higher amid hopes of expectations of a rebound in the second half of this year, profitability for the chipmaker appears a long way off. In addition, the decision makers at Texas Instruments do not appear to believe that the stock is likely to see significant appreciation. Late Wednesday, the chipmaker said it sold 274 million shares, or 43% of its stake, of MU. Texas Instruments had acquired the shares as part of a sale of its semiconductor memory business unit to Micron. According to reports, the stock was sold to “take advantage of recent gains in Micron shares.” And, given MU’s 5-month 100% surge in the face of ongoing weakness in DRAM prices, that might not be such a bad idea.
Frederic Ruffy Senior Writer & Index Strategist Optionetics.com ~ Your Options Education Site Visit Fred Ruffy’s Forum
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