Micron Technology (MU, 23.25) - shares of MU have been on a severe down trend due to a sharp decline to it's 16-megabit DRAM prices which declined from $6.50 in August to the current price of $3.80. The prices in the spot market have fallen to $3.25. If MU's contract prices falls to $3.25 and stabilizes through November and beyond, this would bring down MU's average contract price to $4.20. The $4.20 would represent a decline of 35% from the ASP of $6.50 that MU realized in the previous three-month period. Based on rapid decline of DRAM prices, analysts have been reducing the fiscal Q1 (November) EPS estimate from $0.29 to $0.12 and the full year number from $1.45 to $0.60. MU is likely to increase shipments by 25% in the current quarter but, overall cost reductions are likely to be lower than expected - only because earlier reductions were so considerable. MU achieved gross margin of 44% last quarter which demonstrated it's ability to be a low-cost producer. However, with prices falling sharply this quarter and with less opportunity to offset on the cost side, MU appears likely to fall short of matching the previous quarters gross margin of 44%. Analysts believe that the sequential decrease on gross margin could be as much as 11%. MU's transition to 64-megs is not going smoothly there either, as prices have been under pressure similar to 16-meg. As long as world supply exceeds demand, prices of DRAM will be under pressure and this will affect companies such as MU. Near term, the earnings outlook on MU appears to be bleak which could pressure the stock towards $18-$20. Longer term, as DRAM prices are expected to bottom around $3.0, MU and others are expected benefit once prices start to rise.
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