Elpida Could Help Micron Hit $12

DRAM prices have been in a tailspin. Just recently, they have stabilized, as production has began to decrease. Not only has production been falling, but consolidation is occurring in the industry. We are seeing a consolidation cycle, as the less profitable companies are either going bankrupt or are merging with competitors. Many of you may be familiar with Elpida Memory. The Japanese semiconductor is one of the largest producers of DRAM in the world. However, it has been experiencing significant financial strain recently. For the last quarter, Elpida reported a loss of $575 million, which is more than what it reported a year earlier.

The company is losing market share and has a significant debtload as well. Its very likely that the company will either go bankrupt or merge with someone else.

What Does Elpida Memory Have To Do With Micron (MU)?

Well there are rumors circulating that Micron may inject capital into the company or possibly even merge with them. It would seem that with Elpida performing so poorly financially, it may not be in Micron's best interest to merge. Well for one, Micron would not be in this tie-up alone. Nanya Technology would also take part in this deal.

The deal of this nature would cause massive consolidation in the DRAM industry. With demand being so low and prices finally stabilizing, the market may have bottomed.

I don't think DRAM goes down from here, It's starting to feel like a stable market.
- Mark Adams, President of Micron Technology

Elpida does not need to merge with Micron for the DRAM industry to be fine. In fact if Elpida goes bankrupt, that would still help the industry. This means less production coming in.

Elpida's problems are very important to companies like Micron. This is because we are finally starting to see heavy consolidation as profitability is a concern for these companies. Elpida is just the tip of the iceberg, the less profitable DRAM producers will eventually begin to take a hit as well. The industry will consolidate or produce less. Micron is positioned best for this. While the company may have near term problems, their balance sheet is strong, and they will be one of the last companies to remain standing. I recommend investors take a long position in the stock, as it has the potential to return more than 40% in the next year.

This would put a price target around $12. Micron nearly hit $12 last April, as the prices were set to have bottomed. Back then, I was against investors owning it because I felt that prices could drop further. It turns out prices continued to drop the rest of the year. However, I believe the bottom is in as Elpida will show the industry that production cuts are necessary. If cuts don't happen, then bankruptcies will.

Disclosure: I am long (MU).