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THE DAY AHEAD: Micron Technology gives investors whiplash

Micron Technology Inc. (Nasdaq: MU) says the market for dynamic random access memory chips is "encouraging." But unless you like whiplash and head-spinning ups and downs Micron Technology may not be the stock for you.

Micron is arguably the best-run DRAM company there is. It has plenty of capacity, has costs in line and is well managed. And Monday's upside surprise is likely to boost semiconductor stocks.

Micron Technology: A good buy now?

But the DRAM market is a commodity business where it's either feast or famine. Put simply, Wall Street's expectations are basically useless when it comes to Micron.

Once in a while, Micron takes off (chart). Micron was among the best performing stocks in the Standard & Poor's 500 index in the third quarter, up about 64 percent. But Micron shares can come down just as quick. Investors should be careful when deciding whether to buy into Micron shares right now -- the downside risk outweighs the possibility for an upside move.

Take a look at the last two quarters. In the third quarter, Micron missed estimates by a dime. In the fourth quarter, Micron beat estimates by 11 cents. Why bother trying to project a quarter?

Micron reported a loss of 7 cents a share on sales of $1.1 billion. First Call consensus called for a loss of18 cents a share. What fueled this quarter was better than expected selling prices for memory chips.

"During late August and September average selling prices for semiconductor memory increased significantly," said Micron. "The company is unable to predict whether these higher average selling prices are sustainable."

It's a given that DRAM prices will fall, but the rate of the decline is key to Micron's profit potential. Micron makes all of its money on volume and being efficient.

"Average selling prices per megabit declined 23 percent in the fourth fiscal quarter as compared to the third fiscal quarter," the company said, referring to what is good news in the DRAM market. "Declines in average selling prices were substantially offset by realization of lower costs per megabit sold, including lower costs on devices previously held in inventory."

Merrill Lynch's Joe Osha said there are signs that the DRAM market is softening, but he expects spending will pick up significantly while price declines ease. Osha recently raised his fiscal 2000 earnings estimate to $3.84 a share from $2.22.

And so far Osha has the trend right. For 1999, per megabit prices declined about 40 percent in fiscal 1999 following a 60 percent decline in fiscal 1998 and a 75 percent decline in fiscal 1997, according to Micron.

Other analysts are also optimistic, adding that demand for DRAM chips will jump because of the need for communications semiconductors.

For that reason, Micron CEO Steve Appleton said he was encouraged. "Although we cannot determine if recent memory price increases will be sustained, current market conditions are encouraging," he said.

All this optimism should make you wary. History has shown that Micron is a fine stock to buy on dips. Right now, Micron is close to the top.

It can all unravel quickly for Micron. The euphoria about Micron is based on two months out of a semi-disastrous year. In 1999, Micron lost $69 million, or 26 cents a share, on sales of $3.8 billion.

Micron's competitors in Korea can dump chips for a week and mess up a whole quarter. Average selling prices and Micron shares can fall quickly. Micron is a great company in a volatile business.

You could get whiplash.