The MU Bears That Matter

 | Jun 11, 2014 | 7:39 AM EDT
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The Micron (MU) bears look like they have lost their bets in the big DRAM chicken game. Or at least they lost their number one advocate when Merrill Lynch went from underperform to buy this morning.

First, that's an astonishing turn. The analyst, Simon Woo, had been a huge and unrelenting bear. All the way up. He has fought it and fought it, always with the same logic: that the pricing discipline that has almost always seemed to wreck the pricing for commodity chips -- in this case DRAMs -- would happen again just as it has pretty much every time the stock got up a head of steam. He used the standard logic: someone would blink as pricing got good, and would start building factories and eliminate the tightness, then Micron would collapse.

I can't blame him. Many smart people have contended that has to happen. Every time I said something positive about Micron -- and I have many times -- I have run into this logic. It happened in 1995 after Micron stock went from $9 to $47 in a very brief period of time. It happened in 2000 after a dizzying $29 to $97 run.

But this time was different. There had always been multiple players in the DRAM business. There were so many players that someone always had to blink. It was illogical to think that someone wouldn't want to grab market share or perhaps buy some semiconductor equipment, put up a quick factory and cash in on that fabulous pricing.

But a funny thing happened along the way to the competitive slaughterhouse: it closed. Or, more accurately, Micron closed on the Elpida deal for $2.5 billion and the world changed. Instead of multiple players, there were only three: Samsung, the world's biggest, Micron and Hynix.

When you only have three players, it is a very different world, a much less competitive world. And this time nobody blinked.

Except Woo.

Today he makes it clear that his $22 price target, one that was repeatedly raised pretty much against his will as the stock moved higher, is no longer active. He replaces it with a $40 target. He makes it clear that pricing is going to stay strong and costs for production are going down, so his numbers are way too low.

He basically throws up the white flag.

Now I am a big believer in old tech here, everything from Microsoft (MSFT) and Intel (INTC) to Hewlett-Packard (HPQ), Cisco (CSCO) and Oracle (ORCL). I like Western Digital (WDC) and Seagate (STX) and Sandisk (SNDK). I like them all for the same reason: the world's gone rational. The competition has dimmed. Nobody's putting up new plants because everyone's so grim, determined and bearish, which is the exact opposite of how this industry used to be.

In other words, the execs in the industries have gotten out of playing the starry-eyed games they always have. That's really what Woo got wrong.

Today you will hear that now is the time to go negative, when the big bear capitulates.

My only problem with that is there is still no sign whatsoever that the bears in the industry -- the people who run the companies -- believe things have really gotten better.

They are staying cautious.

That's what Woo missed.

That's who really mattered all along.

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