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Even with Big Backers, Chip Maker Micron Is a Bad Bet
by Erick Schonfeld
Predicting where memory-chip maker
Micron Technology's stock is going is as
imponderable as a quantum physics
equation. Nonetheless, Micron is a good
lesson on why investing in tech companies
is so hard, since it requires an
understanding of the short life spans of
products and the dynamics of business
cycles.
Right now Micron is reeling from a 95%
collapse in the price of its mainstay
commodity, DRAM memory chips, over the
past three years, as well as weakness in its
PC business. In its fiscal year ended last
Sept. 3, Micron lost $234 million, on
revenues of $3 billion. As a result its stock
is trading around $38--tumbling 22% since
its high last year. But in the past few
months prices for DRAMs have stabilized,
and two big investors have stepped up to
put in some money.
Intel just announced that it's paying $500
million for rights to 16 million shares of
stock. And in September, Texas
Instruments swapped its DRAM assets,
including factories and equipment, for $880
million worth of Micron stock, or 29 million
shares. Texas Instruments is also giving
Micron $550 million in cash, and it is
receiving two debt notes, one of which can
be converted into another 12 million shares.
Asked why his company wants Micron's
stock, Texas Instruments CFO Bill
Aylesworth says, "We think we can realize
two to three times its current value by
selling it over the course of another up
cycle." If Micron's stock is good enough for
these behemoths, shouldn't it be good
enough for the average investor, who need
sell only when Texas Instruments does,
presumably at the next top?
Maybe. But before you risk your savings on
this stock, consider the uncertainty you'd
be buying into. Don't look to Wall Street for
clarification. Even BancBoston Robertson
Stephens analyst Dan Niles, one of the
most ardent bulls on Micron, warns, "This
company will either make more money or
lose more money than you ever thought
imaginable." For fiscal 1998, Micron lost
$1.10 a share. But Niles is so bullish that he
thinks Micron can recover to earn a full 80
cents a share in fiscal 1999. Merrill Lynch's
Tom Kurlak, who is neutral on the stock,
thinks the opposite: that the company will
lose 80 cents, maybe more. Other analysts
are also all over the map.
Even Intel's and Texas Instruments' motives
for investing in Micron are different from the
average investor's and from each other's. In
return for its money, Intel is requiring that
Micron build a certain type of DRAM memory
chip that works faster with its
microprocessors. Says Kurlak, "Intel is not
looking for a return on its investment. The
money is more of an insurance policy to get
Micron's cooperation."As for Texas
Instruments, it was getting killed in the
DRAM business, so it desperately wanted to
get out. Needham & Co. analyst A.A. "Tad"
LaFountain III, who rates Micron a sell,
says, "For all intents and purposes, they
paid Micron to take the stuff away."
In fact, an investment in Micron boils down
to a bet on where you think DRAM prices
are headed. A 64-megabit DRAM chip now
fetches about $9, compared with $43 a
year and a half ago. Prices are stabilizing
because Asian manufacturers are shutting
down some production lines to stanch their
losses. Micron, however, is purchasing
about $900 million worth of new equipment
this fiscal year, which will reduce its costs
per chip from an estimated $8.50 a chip to
$5 in a year. If chip prices stay steady, as
the bulls think, Micron will make out like a
bandit, capturing market share and
improving profit margins. If prices drop to
about $6, as the bears think, there won't
be much profit left. "The notion that
everyone will stand back and watch as
Micron lowers its costs is just wrong," says
LaFountain. So unless you have strong
convictions about DRAM dynamics and some
mad money lying around, it's probably best
to watch this one from the sidelines. |
