2HRS2GO: Micron Tech a short-term worry, long-term rock

4 min read

Now if only PC prices would start going down again.

Last month people started wondering about DRAM prices in the wake of a hugely successful fourth quarter report from Micron Technology (NYSE: MU). An analyst report today says the market was right to worry, at least for now.

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Gruntal & Co. analyst Mona Eraiba and associate Vincent A. Benedetti downgraded Micron's intermediate rating to "market performer" from "outperformer" and set an intermediate price target of $75, down from $100. The move came after the analysts spoke to Micron Tech executives, who said they see DRAM prices in the $8.25 to $8.50 range, or lower than the $9 expected by Gruntal.

"We believe Micron stock is somewhat vulnerable short term as concern regarding pricing intensifies," the analysts write.

Shares of Micron were down slightly on the report. MU stock basically has been treading water between $70 and $80 per share for the last month, which indicates investors are already taking price fears into account.

In fact, the market seems to be waiting for things to blow over. MU's current trading range is just below its all-time high, and it doesn't look inclined to drop lower.

That's not surprising if you take a long term view into account. Eraiba maintains a long-term "outperformer" rating with a price target of $150 per share on Micron Technology.

"Longer term, we expect the DRAM market to expand strongly as the new PC corporate upgrade cycle picks-up steam with the introduction of Windows 2000 and continued limited DRAM capacity," she writes. "Micron is extremely well positioned to capitalize on its leadership position in the DRAM market."

Micron has become a memory chip monster that won't go away anytime soon. In the long run, DRAM prices probably will rise, much to the chagrin of PC buyers.

Unfortunately, DRAMs remain commodities in the end. Not exactly a great thing for technology investors, save those who also like to trade pork bellies.

JDS Uniphase builds an optical titan

Maybe it's time to view JDS Uniphase (Nasdaq: JDSU) as the Cisco of hardware for boosting fiber optic bandwidth. Today's $15 billion deal to buy E-Tek marks JDS Uniphase's seventh acquisition or merger announcement in six months.

Shareholders of JDS Uniphase should love the strategic implications of the agreement, dilution notwithstanding. Would you rather JDS Uniphase take on enormous debt to build more capacity? The company had to get it from somewhere, and a stock acquisition lets it happen without disturbing a strong balance sheet.

However, as The Wall Street Journal notes, purchasing E-Tek could draw more attention than usual from antitrust regulators, because the deal combines the top two players in a roaring market for passive optical components. "What would you rather have, two suppliers who can't meet demand or one that can?" asked E-Tek's chairman, Michael Fitzpatrick.

It's a slightly disingenuous way of framing the issue, since E-Tek also could have increased scale by combining with smaller optical players. But that wouldn't provide the hefty stock premium provided by JDS Uniphase.

Executives from both sides also point out the optical components market, like most areas of technology, changes very quickly. But that's an easier argument for mergers in software or Internet content, which don't need large plants.

Once a big player is established in a hardware or component field, it's much more difficult for smaller companies, not because creating superior technology is so hard(although usually it is), but because it's hard to crank out in volume. Just ask anyone who's ever tried to unseat Intel in microprocessors or Cisco in routers. If boosting manufacturing capacity were that easy, JDS wouldn't need to buy E-Tek in the first place.

Other issues:

  • Beyond.com
  • (Nasdaq: BYND) A couple of months ago CS First Boston analyst Lise Buyer said this stock is for speculators only. Guess what? They're speculating today, with BYND shares up on news that the company will resell Red Hat Linux to the U.S. government.

    Optimists would no doubt argue today's boost will be sustained because the market already priced out Beyond.com's recent revenue warning. But if recent history is any guide, the current rise won't last; these Linux-related stock spikes usually don't.

  • Eidos Interactive
  • (Nasdaq: EIDSY) The game software industry is one of the most fascinating fields to follow, but it can be tough on investors because it doesn't take much for a company to fall off the pace.

    American depositary receipts of Eidos have been slumping since they reached an all-time high in mid-December. Today the company confirmed investors' fears when it warned of lower-than-expected unit shipments, revenue and earnings. Credit analyst Timothy Steer of Merrill Lynch for calling it two weeks ago, when he lowered his Eidos near-term rating to "neutral" from "accumulate".

    Weak sales and delays in new releases hurt Eidos. "The company experienced greater than expected slippage which the board believes to be due in part to the consequences of the growth in the number of products under development," Eidos says.

    In other words, Eidos couldn't handle expansion. Obviously that doesn't speak well for management, but it's especially damning for a company in an oversaturated field like game software. The upcoming release of Playstation 2 should help, but you can say that for any major publisher of entertainment software. Can Eidos rise above the pack again? Barring another Tomb Raider-like hit, you have to be skeptical. 22GO>