This key component of the personal computer became a commodity after the dot-com boom, and its seemingly unlimited supply and availability resulted in falling prices.
There has been no hedge fund craziness with this commodity to drive up prices. Nope, this poor little semiconductor chip could not attract any sort of interest on the buy side. As a result, companies that make the DRAM chip have been struggling to survive.
One of the big players in the DRAM market is Micron Technology Inc. (NYSE: MU). Its shares have collapsed along with prices for DRAM chips. Over the past two years its shares have fallen from a high of $15 to a low of $1.59.
Obviously investors fear the worst at MU. Shares are valued as if the company was heading toward bankruptcy, and even though the stock has rallied off its lows during the past month, things still look dicey for the company.
There is really very little positive news to report on MU. Over the weekend, fellow DRAM maker, Qimonda (NYSE: QI), received a 325 million euro ($454.7 million) bailout that will give the company a lifeline to help it weather this perfect storm of falling demand amid a global recession.
Will it be enough to save QI? That is unclear, but investors of QI are cheering, pushing the stock up more than 70% on the news. Of course, the headline may be sensational, but keep in mind that the stock was trading for 30 cents as of the close on Friday.
As for Micron, the news of a QI rescue pressured shares. Investors sold the stock, as the survival of a rival does little to help the inventory and capacity glut in the market. PC sales are tanking, and it would be far better for Micron to have QI fail.
Shares of Micron are down more than 15% on the news, and the stock fell as low as $2.35 earlier in the day.
Micron releases earnings tomorrow, and although investors have already written off the quarter that ended in November, it will be important to look for clues going forward. The estimate for the quarter is for a loss of 43 cents per share.
At the moment, analysts expect the company to lose $1.35 for the 2009 fiscal year ending in August. Investors should expect guidance below that number. In a worst case scenario, the company pulls its guidance for the year.
As for valuation, Micron should be able to weather the storm, making the bankruptcy scenario unlikely. The company has more than $8 of book value and more than $1 billion of cash on the balance sheet.
MU has about the same amount ($1 billion or so) in debt, but the current ratio of 2.4 is healthy. My point is that the company should be able to withstand multiple quarters of losses.
That is a good thing, as it is almost certain that DRAM prices will be too low to support profitable operation. Changing that dynamic will take shuttering plants and reducing expenses. That will take time.
I don't think Micron will fail. As such, it seems like the selling today may provide an entry point for long-term investors willing to take risk.
Jamie Dlugosch is a contributor to InvestorPlace.com.
Before the Bell: Futures Higher on Greece Rescue Hopes
Serious Money: Cheapest Stocks List Shrinks from 26 to 21
Chasing Value: Hasbro Earnings Makes My Point
Reader Comments (Page 1 of 1)
12-23-2008 @ 11:11AM
BHarrison said...
Well, you know there might be a lot of companies who stocks "might be 'worth' the risks"; however there is SO LITTLE INTEGRITY in the market that one lacks the "faith and cnfidence' to do almost anything in the current markets.
The government, via the Fed, the SEC, etc., MUST implement the "reasonable prudent "regulation and oversights" into the markets to instill INTEGRITY into the markets, the FIs, and the corporations.
All of this will take time; and the markets are gooing to be fairly stgnant until that occurs. People are just too leary of the "manipulated markets". And there is a growing consensus that there may be an additioonal 20% "downward adjustment in the markets by the end of 2009. Right now it is a "FOOL'S Market'.
Investments in the markets are like bank loans . . . the money is there; but the lack of "faith and confidence" in the integrity of the markets are going to keep investments on hold, the same as banks are doing with loan monies.
As long as CEOs and upper managment continue to take TENS and HUNDREDS of MILLIONS of dollars "off the top" for failed, incompent, and/or CORRUPT MANAGEMENT of the corporations, the prudent "average investor" is not going to be sucked into unsound investments.
"RECOVERY is primarily dependent on "INTEGRITY" being instill in the FIs and the markets.funds. The financial institutions (and their employees) will not easily recover from their "sins of the past" . . . they destroyed a large segment of their consumer market with the pyramid and Ponzi schemes of the past.
Madoff, a previous Chairman of NASDAQ will long be remembered as the "poster child" for the FIs, the markets/funds. Wall Street is responsible for its own demise via the destruction of our economy.
As has been demonstrated to date, there is not a SINGLE investment counselor or firm that I have ANY faith or confidence in. . . . they have ALL been shown to be charlatans and defrauders. (I'm just fortunate that i kept 90% of my monies in cash in various bank acounts . . . which I am now going to cash out . . . "cash in-the-hand" (safety deposit boxes) is the only "safe haven" for the moment.
I'm not going to be a fool and invest my capital for another 20% beating at the hands of the market manipulators.