It must be an awful headache being an analyst these days.
At one time the sell-side researchers could be specialists. They still pass themselves off that way, yet the reality of changing business models dictates a more general approach.
Think about it. If AOL Time Warner goes through, do you pass it off to your ISP/portal analyst or your media specialist? Do IBM (NYSE: IBM), Compaq (NYSE: CPQ) and Hewlett-Packard (NYSE: HWP) fall under computer systems or IT services?
Traditional box makers provide especially large headaches, because they're all trying to become something else. Gateway (NYSE: GTW) sees the PC as merely a launchpad for its overall revenue. Dell (Nasdaq: DELL) now competes not only with Compaq, but also with EMC (NYSE: EMC).
Then there's Micron Electronics (Nasdaq: MUEI).
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With its PC business stagnating, the company wants to turn itself into a Web hosting giant. That forces all those hardware folks covering the company to turn themselves into Internet analysts.
And so we have Robertson Stephens' Daniel Niles and Banc of America Securities' Kurtis King today upgrading MUEI to "buy" from a "market performer" ratings, with price targets of $25 and $27 respectively. Shares responded with gains of almost 10 percent by this afternoon.
Niles, Robby Stephens' oft-quoted chip and computer hardware analyst, believes Micron's core PC business is still struggling, but he argues the MUEI stock price doesn't reflect the value of the company's website and application hosting operation.
Through acquisition, Micron Electronics has turned itself into the fourth largest Web hosting company in the United States, with more than 40,000 accounts currently and an expected 100,000 by year's end. Niles believes Web hosting will generate $60 million in revenue this year.
The Robby Stephens analyst puts a value of at least $1.8 billion on that webhosting business, based on a multiple of 30 times revenue. Publicly-traded web hosting firms Data Return (Nasdaq: DRTN), Digex (Nasdaq: DIGX) and Globix (GBIX) trade at an average of 68 times revenue, Niles notes.
King is even more optimistic. He projects Micron webhosting with market cap of $2 billion to $3 billion. The BofA analyst sees the closest comparable competitor as Globix, which recently was trading at 40 times this year's estimated revenue.
Both valuation schemes conclude Micron Electronics is extremely undervalued at yesterday's closing market cap of $1.7 billion. The current MUEI market cap values the hosting outfit at a mere $500 million to $600 million, if you factor in the recent run-up, King says.
But maybe it's the other way around. Perhaps the low market cap reflects the market's opinion of the rest of Micron Electronics' business. You know, that PC-making stuff that merits barely a passing mention in King's report?
You know, the business that saw lower year-over-year sales each of the last four quarters? The business that saw a "horrible" January, according to Niles, who now foresees second quarter PC revenue of $233 million, far lower than his earlier estimates. The business that King dismisses immediately.
"MUEI's current hardware businesses are so-so and probably aren't a reason to own the stock at this point," he writes.
So much for 70-plus percent of Micron's current revenue.
On the plus side, Niles and King expect Micron to announce a build-to-order partnership with a large electronics retailer, similar to the pact between Gateway and OfficeMax.
Great. Instead of losing share to Dell, Micron Electronics can lose ground to Gateway, Compaq and other companies more established on the retail side.
But why worry? If Micron does "monetize" (spin off) Web hosting and related services, the company buys more breathing room to revive its PC operations.
"This gives us essentially a free option on the PC business turning around," writes Niles. "Given our belief that 2000 will be a generally good year for PC demand and pricing, this is a risk we are willing to take."
If you're inclined to buy MUEI, perhaps now is as good a time as any. Because after Micron Electronics spins off those e-services (if it does), it's back to being a box maker.
Today's 4-for-1 split won't mean much in the long run unless those RDRAM-equipped PCs start flooding the market. Last week Rambus said two more memory chip producers were Rambus-certified, bringing the total to five. But at least for now, the technology costs remains too expensive for mass market penetration.
But if Deutsche Telekom wants to be truly forward looking, why buy a landline company at all? Be creative, go for wireless. On the other hand, that may require another effort to bust up a merger, since the biggest independent wireless company would be the pending Mannesmann-Vodafone combination. 22GO>