It’s a sure sign of optimism when investors finally respond to obvious deep-value plays. In early December, I lamented that the herd was ignoring a favorable legal verdict and robust balance sheet in support of memory chip maker Micron Technology (NYSE: MU).

Shares traded well below tangible book value back then, which has belatedly brought in value investors. They’ve bid shares up 35% since early December (up near current book value), and what used to be a value play now holds appeal as a growth play. A move up from the current price near $8 to $11 or $12 looks quite feasible in 2012, as Micron’s industry dynamics steadily improve. (This would be a gain of at least 50%.)

Technology investors tend to move in and out of memory stocks based on industry pricing trends. When memory prices are falling, these stocks are untouchable. This was surely the case for Micron for much of the last year. Indeed, at the start of the fiscal second quarter in December, management predicted DRAM prices would fall 15% from the previous quarter, thanks to weak demand for computers. Instead, DRAM prices appear to have bottomed, and are now up 10% since the second quarter began, according to DRAMeXchange.com. (As a refresher, DRAM stands for dynamic random access memory, and is used to store data that are most frequently accessed by a computer. So the more DRAM a system has, the less power it needs to get data from less accessible data that is stored on the hard drive.)

Still, DRAM prices remain well below levels seen a few years ago. And though Micron remains marginally profitable in this segment, many of the company’s rivals are losing money on every chip they sell. Japan’s Elpida is said the be generating negative gross margins of 45% in the current quarter. For a company that has a lot more debt ($5 billion) than cash ($1 billion), the money-losing can’t continue.

That’s why media reports are suggesting Elpida has approached Micron for a financial lifeline. (Micron had $2.4 billion in gross cash at the end of the last quarter.) Thanks to Elpida’s deep financial distress — $600 million in bonds are coming due in March and another $1 billion is due to the Japanese government in April — the company will almost surely end up in the hands of either Micron or another industry player. This would be good news for all concerned, as it would likely lead to a reduction in industry output, since some of Elpida’s manufacturing would be taken off-line. The logic is simple: Fewer DRAM chips means firmer DRAM prices. Analysts would likely raise their DRAM pricing forecasts — if and when Elpida makes a formal decision.

Flash is the future
Yet as I noted back in December, investors may not be noticing that Micron is slowly reducing its exposure to the volatile DRAM market while boosting its exposure to solid state memory, known as flash. This market has fewer competitors, firmer pricing and represents the high-growth end of the market, since computer makers and smartphone makers consume rising quantities of flash memory.

As the sales mix for Micron keeps migrating toward flash, look for investors to view this as a growth stock rather than a value stock. As a point of reference, while Micron trades near tangible book value, Sandisk (Nasdaq: SNDK), which is more of a pure play on flash memory, trades for two times book value. This gap is likely to grow steadily narrower.

My view: shares of Micron will trade up to 1.4 or 1.5 times book value later this year, which is where this stock has traded in the past when the DRAM pricing cycle becomes more favorable. The flash segment of the business simply adds support to the price-to-book thesis.
 
Risks to Consider: If Europe heads into a deep slump, then technology spending would grind to a halt, pushing DRAM prices even lower. Also, if investors conclude that Micron ended up overpaying for Elpida and the company fails to articulate how the deal will boost bottom-line results, then recent buyers of the stock would likely take profits and sell.

Action to Take –> Micron’s next quarter is likely to come in ahead of forecasts if the recent DRAM price trends remain intact. Management’s outlook for subsequent quarters is likely to be noticeably more bullish. Investors should research this stock now and have a plan of action well before quarterly results are released in mid-March. As stated earlier, I think this stock could have as much as 50% upside.

[Note: If you haven’t heard about this unique opportunity, then I want to tell you about it now. StreetAuthority has staked me with $100,000 of real money to invest in my absolute best ideas. For a limited time, you’ll be able to follow along with me completely free. Go here to learn more.]