Goldman Sachs downgrades the shares as excessive DRAM inventory hurts prices
Micron Technology (MU) lost more money during recent months than many had expected, as the Boise, Idaho-based company struggles to keep up prices on its computer memory products. The pressure might not end, as Goldman Sachs raised concerns that bloated inventory of DRAM memory chips could keep prices down.
During the second quarter ended Mar. 1, Micron incurred a net loss of $52 million on net sales of $1.43 billion. In the same period of 2006, the company had earned $193 million on $1.23 billion in sales. "Notwithstanding current, challenging market conditions, the size of the markets for our semiconductor products continues to grow at an impressive rate," CEO Steve Appleton said in a statement Apr. 4.
Micron shares dropped 3.5% to $11.65 in early afternoon trading on the New York Stock Exchange.
The company's memory chips are used in an increasingly broad range of electronic devices, including personal computers, workstations, network servers, mobile phones, digital still cameras, MP3 players and other consumer electronics products. But prices keep falling on many such commodities. The company's NAND flash memory products, for example, suffered a nearly 30% reduction in average selling prices in the second quarter.
The upshot was that Micron lost 7 cents per share during the second quarter, while analysts surveyed by Thomson Financial had been expecting the company to give up only a penny per share.
Meanwhile, Microsoft (MSFT) launched its Windows Vista operating system on Jan. 29, wreaking the havoc of transition onto the computer industry.
"Although the company noted it has recently seen more stable memory prices, we remain cautious about selling prices in the face of a slow uptake of Vista by enterprises, and macroeconomic risks," Standard & Poor's Equity Research analyst Clyde Montevirgen said in a research note. He cut an estimate on the company's earnings for the fiscal year 2007 ended in August by 47 cents to 25 cents and a 12-month target price on the stock by $2 to $16. He kept a hold opinion on the stock (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.)
Goldman Sachs analyst James Covello downgraded the stock to sell from neutral, saying he expects weak DRAM (dynamic random access memory) pricing to serve as a negative catalyst for the stock. Covello says his analysis shows significant excess DRAM supply throughout 2007.
Micron's pricing problems have been going on for years, according to Morningstar. "Chronic periods of oversupply result in price erosion that is exacerbated by the significant buying power of a handful of customers, such as computer manufacturers, whose products are also susceptible to price erosion," analyst Alex Ross said in a note March 19. For example, the technology giant Hewlett-Packard (HPQ) accounted for 10% of Micron's fiscal year 2006 sales, according to S&P.
(Stacy Trombino contributed to this report.)