A Wild Ride

 | Jun 27, 2013 | 4:00 PM EDT
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Has anyone looked at the shares of Micron Technology (MU) lately? The stock is on a wild ride. Year-to-date, the stock is up almost 115% and the shares are just a few pennies from their 52-week high. At this point, to get bullish on the stock, I think you would have to be on par with Nik Wallenda walking across the Grand Canyon.

In a squeaker last week, Micron narrowly beat analyst's expectations. Strong pricing, new die shrinks and the shift of production from DRAM to NAND memory have powered the stock. Furthermore, the company was able to acquire additional capacity by buying bankrupt memory maker Elpida Memory. The acquisition will give Micron about 45% more capacity. In terms of wafer capacity, Micron is the third largest memory maker and can process an estimated 2.2 million wafers a year with a 25-to-20 nanometer equivalent die size. (Samsung and Toshiba are both about twice the size of Micron in terms of wafer starts.)

Investors have been quite bullish on the shares. Last week a boatload of analysts slapped price targets on the stock as high as $21, saying world wide demand remains strong and pricing would hold up. The enthusiasm comes from the fact that Micron is working hard to convert the majority of its DRAM production in Singapore to NAND. Similar to USB card, NAND, also known as FLASH, stores data even when the power is off. FLASH and mobile DRAM has taken off as new gizmos like smartphones and tablets eat up the chips like a bunch of hungry people at a barbeque.

Most analysts think supply and demand can stay balanced. If that happens, Micron will be able to increase its gross margins, which would translate into higher earnings. To be really bullish on the stock, you have to assume gross margins will increase another 0.5% from the second quarter to the third quarter, which would result in margins over 30%. You also have to assume fiscal 2014 revenue is going to move much higher. In fact, revenue has to go from an estimated $8.7 billion in fiscal 2013 to $10.2 billion next year.

The bulls argue that the industry hasn't added enough capacity to meet the demand. In fact, with die shrinks and new fabs, the industry will only grow wafer capacity about 6% to 13.7 million wafers. That is the lowest wafer additions in years. Usually, the industry grows wafer capacity between 12% and 17% annually. Bulls point out that even if the entire industry shrank its die size from 24 nanometers to 19 nanometers, capacity would only increase supply by 25%, which is probably not enough to wreck pricing.

At this point, every semiconductor investor in the world knows all of this. I think it's all priced in. Every semi investor is already in the stock waiting for the others to push the stock higher. It's like a game of chicken. And that's why I think you have to be Nik Wallenda walking across the wire. I've been burned my Micron so many times in the past, I'm reluctant to try and "out bull" the bulls.

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