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Micron-Elpida Deal Looks Promising

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Micron Technology Inc.’s (MU - Free Report) decision to bid for Japanese chip maker Elpida might well turn out to be a great one. Now that the company has won an excusive right for helping to pay off Elpida’s debt, the news of tablet maker Apple Inc.’s (AAPL - Free Report) reliance on Elpida for DRAM (Dynamic Random Access) chip supply is definitely a reason for cheer.

On the flip side, this news might put off Samsung Electronics, as Apple’s decision to choose Elpida as its chip supplier reduces the company’s dependence on Samsung’s chips. Eventually, this could put pressure on Samsung’s fundamentals, and the concern was soon reflected in Korean stock exchange through a 6.0% drop in its stock price yesterday.

Of course, this will further spice-up the ongoing battle between Samsung and Apple over smart-phone and e-Reader market share.

Mobile DRAM Market Share

According to the U.S. technology market research firm IDC, Samsung headed the mobile DRAM market with roughly 52.0% share in 2011, followed by Hynix Semiconductor with 27.0% and Elpida with 17.0%. Amongst these key players, Micron seems to be an amateur with merely 4.0% share in the market.

With Elpida, Micron will be in a position to create competitive pressures on the others. Moreover, supplying chips to Apple will be an added advantage, which could boost its market share.

Though Micron’s prospects in the mobile DRAM market look promising, it will not be easy to outpace Samsung. Samsung has held the largest share of this market for years and there are indications that it will sustain the same rank for the coming years as well. Recently, another research firm TrendForce revealed that mobile DRAM production capacity was increasing. The firm has also estimates that Samsung has already taken roughly 7.0% market share in the first quarter of 2012.

Market Scenario

DRAM chip production capacity is growing. However, the market could face challenges due to the oversupply situation, which is leading to slowing ASPs (average selling prices). Though the DRAM market will feel the pressure of oversupply and low pricing in the first half of 2012, Gartner affirms that a decelerating supply and increasing demand will lead to an improved scenario starting from the second half of 2012 and running into 2013.

With a solid cash position, we believe that Micron will be able to win the bid for Elpida and position itself to capitalize the consolidation in the DRAM market.

Micron Technology has a Zacks #3 Rank, implying a short-term Hold recommendation.

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