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Micron Grabs for Stabilizers

It's the nature of the beast: Micron Technology, the world's No. 2 maker of basic computer memory chips, has either a fabulous year or a really awful one. There's no middle ground. Most memory chips, used to store data, are a commodity in an industry plagued by overcapacity. When PC sales are going strong, as they were in the late 1990s, Micron (MU) basks in profitability and revenue. In 2000, it reported revenue growth of 147% and $1.5 billion in income. When PC sales tumble, Micron suffers.

Most recently, it has lost money for two consecutive years, and in its latest results, 2002 sales fell 34% from the year before. Micron burned through more than $200 million in cash last quarter, leaving it with just $398 million in cash and equivalents at the end of the August.

Investec analyst Eric Ross believes that Micron's stock is trading near its trough. It's now $16.85, down 57% from a 52-week high of $39.50. While that may look tempting, most analysts think a strong rebound is about a year away.

EMERGE STRONGER.If the price of memory chips were to stop falling, Micron perhaps could prevent further deterioration in its business. But that's not likely. Charles Boucher, a Bear Stearns analyst, estimates that Micron should break even next August. However, in a best-case scenario, it could return to the black as early as February, according to Merrill Lynch analyst Joseph Osha.

Micron's plan is to emerge as a stronger competitor when a chip recovery materializes. While the outfit is still focused on computer memory, in the past year it has also begun to get into areas that offer more stability. Thanks to these diversification efforts, future demand declines in might not hurt Micron as much.

It has invested in new, fast-growing areas -- imaging and certain networking chips -- that are less commodity-like than DRAM (dynamic random access memory), the most basic memory chips. Last fall, Micron acquired Pasadena (Calif.)-based Photobit, which makes image-capturing sensors used in digital cameras, video cell phones, and medical devices. Micron then bought, for a mere $4.5 million, a line of networking chips from Music Semiconductor in February. They can speed up routers, which direct data along telecommunications networks.

SUBSTANTIAL GAINS? Both networking and imaging businesses will enter prime time next year, Wall Street believes. Micron is ramping up plants for making the sensors, although it declines to provide any specifics other than to say "we're growing week by week," according to Michael Sadler, its vice-president for worldwide sales. In networking, Micron should unveil a groundbreaking product, created in a partnership with German rival Infineon (IFX), in early to mid-2003. "To grow the company at the rate we want to, we have to enter the emerging markets," says Sadler.

In three to five years -- about the duration of another roller-coaster semiconductor cycle -- these businesses could add up to a double-digit share of Micron's sales, reveals Sadler. That would be substantial for an outfit that booked $2.6 billion in revenue in the fiscal year ended in August. Today, about 80% of Micron's revenue comes from chips for PCs and the rest from chips for servers.

Micron seems to have chosen these new areas wisely, analysts say. The imaging sensors it makes, called CMOS (complimentary metal oxide semiconductors), are less expensive and consume less battery power than the older ones competitors make. That's a major plus for mobile applications, which Micron is focused on. As cell phones with color screens take hold, the chipmaker could grab a chunk of a billion-dollar market, says Shawn Maloney, director of marketing for its imaging division.

AIRBAG CHIPS. This market is growing at 50% a year, estimates Jay Strivatsa, an analyst with chip consultancy iSuppli. Plus, demand will also come new applications in cars, such as chips that can determine a passenger's heft and adjust the airbag's velocity accordingly -- potentially preventing smaller adults and older children from getting squashed.

The market for specialized networking chips, so-called TCAMs, which speed up data transmissions should grow to as much as $300 million in 2005 from $50 million today, estimates Linley Gwennap, president of networking-chip consultancy Linley Group in Mountain View, Calif. That's peanuts for Micron, but this area is only one of the networking-chip markets it's pushing into.

Micron has also partnered with Infineon to develop so-called reduced-latency DRAM, an even-faster networking chip due in 2003, which no one else has, says Gwennap. "Reduced-latency DRAM will be used by most routers," says Jan du Preez, vice-president for Micron's networking and communications group. "We're putting a lot of resources in networking. We want to become indispensable as a networking supplier."

NO. 2 AND HOLDING. Micron, the largest U.S. memory supplier, is well-suited to take advantage of these markets. Unlike much of the competition, it operates its own facilities worldwide -- eight, including joint ventures -- and has more flexibility in making modifications to a product or putting out smaller batches of chips.

It's also a pro in reducing costs and grabbing market share in a fiercely competitive field. Its recent manufacturing improvements have lowered the latest quarter's cost-per-megabit of memory by about 10%, according to company filings. And Micron has held on to its No. 2 slot in DRAM chips this year, in spite of aggressive moves from market leader Samsung, say analysts.

Micron will certainly hit glitches along the way, first of which is its years-old focus on DRAM. "They're kind of like [PC-processor king] Intel," says Salomon Smith Barney analyst Jonathan Joseph. "They're so big in DRAM, it's hard to do anything else." Plus, Micron would need to establish new customer relationships in markets where rivals like Sony -- which makes the older type of imaging sensors -- already rule. Finally, Micron, like a number of industry giants, remains the subject of an ongoing antitrust investigation, according to its public filings.

A PC PICKUP? Most analysts say they don't know what the outcome of the investigation will be, but they feel confident enough to recommend the stock. And the cash Micron will start seeing when the DRAM market recovers, probably in late 2003, should help. Already prices on certain kinds of memory have risen in the past few weeks, due to temporary shortages.

While that could be brief, signs of a long-term recovery are emerging as well. On Oct. 28, Michael Dell, chief of the world's largest PC maker, Dell Computer (DELL), said he sees a pickup in demand for PCs. And DRAM purchases should rise in the second half of 2003, as some businesses prepare to replace outdated computers, says Brian Matas, an analyst with chip consultancy IC Insights.

Investors who want a placeholder in the chip sector would probably do well with an outfit like Micron. When the recovery comes -- and if Micron's diversification efforts work -- this chipmaker should emerge as a formidable player, able to remain less disoriented when the next drop in chip demand comes. Kharif covers technology for Business Week Online in Portland, Ore.

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