Micron Takes One on the Chin

Updated

The hits just keep coming for Micron Technology (NAS: MU) , and not in a good way. More like an uppercut to the chin followed by a left hook in the kidney.

Micron shares plunged more than 9% in the past two days on a disappointing third-quarter report, bringing the three-month returns to a negative 36%. If you bought Micron shares in the past year, you're sitting on anything from a 36% gain to a 30% loss, depending on when you pulled the trigger. As a Micron shareholder myself, I feel these jabs as if I were in the ring with a hungry Mike Tyson.

So let's take a good, hard look at Micron's report together. Is this yet another knee-jerk overreaction by nervous traders, or is Micron's business really falling apart as we speak?


Fool by numbers
Sales jumped 1.5% year over year to $2.17 billion, besting the analyst target sitting at $2 billion. But the strong top-line performance didn't stick -- Micron lost $0.32 per share, down from a $0.07 net profit per share a year ago and below the $0.20 loss per share that Wall Street had expected.

Management gave credit for the revenue beat to "solid manufacturing" and strong inventory management in the quarter. That included some permanent changes, including a brand-new supply-chain-management system and a restructured joint operation with Intel (NAS: INTC) , so it's reasonable to expect the revenue meat sticking to Micron's ribs going forward.

On the other hand, memory chip prices are sliding again. That's a blessing and a curse: Low prices encourage system builders and consumers alike to buy more memory, but the profit margins suffer. In this quarter, torrential demand couldn't make up for the rapidly crashing average selling prices.

Are you scared yet?
This would worry me if Micron's inventories were on the rise, as they have been over the last two years. But total inventories actually shrank 9% in the quarter, possibly marking an end to the oversupply trend as the company clears out its warehouses. Keep a close eye on inventories in the next couple of quarters to confirm or debunk this theory.

Assuming that inventory levels don't shoot up again, I'm happy with what's going on here. In particular, Micron hooks into the smartphone and tablet revolution with direct flash memory sales to a number of important players. If the proposed buyout of bankrupted competitor Elpida works out as planned, Micron would become a primary memory source for Apple's (NAS: AAPL) iPhones and iPads, even.

Moreover, Micron supplies memory chips to every maker of solid-state storage drives that matters. Whether you're buying SSDs directly from Micron and its retail brands, or from independent drive builders STEC (NAS: STEC) or OCZ Technology (NAS: OCZ) , you're probably sending some money Micron's way. That's a booming business, made stronger by the rise of thin-and-light ultrabooks and their Apple equivalents.

Looking ahead
So the catalysts are lining up, and you can't keep a good company down forever. When all is said and done, I'm still happy holding my Micron shares and would describe this week's dip as a buying opportunity. If nothing else, you should take this opportunity to start a bullish CAPScall on Micron, like the one I re-upped a couple of weeks ago. Great investors buy when there's blood in the streets -- or in the ring. Float like a butterfly, sting like a bee!

If Micron's roller-coaster chart makes you nervous, there's a safer way to lasting riches. Check out the three strongest dividends in the Dow and put your sleeping pills away, because you won't need them anymore.

The article Micron Takes One on the Chin originally appeared on Fool.com.

Fool contributorAnders Bylundowns shares in Micron but holds no other position in any of the companies mentioned. Check outAnders' holdings and bio, or follow him onTwitterandGoogle+.The Motley Fool owns shares of Intel and Apple.Motley Fool newsletter serviceshave recommended buying shares of Intel and Apple.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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