March 13, 2000 4:00 PM PST

Web strategy boosts Micron stock

After spinning its wheels trying to compete against the likes of Gateway and Dell in the PC market, Micron Electronics appears to have finally hit on a strategy that investors like.

Ironically, it has little to do with selling PCs, once the bread and butter of Micron's operations. Instead, the company's stock has gained almost 80 percent this month on the reasoned belief that it will spin off its Web hosting businesses into a separate entity.

Micron has been moving to rapidly transform itself from a PC manufacturer into a full-service provider of computer services. The process began last year with the acquisition of HostPro and Lightrealm. Overall, the company will spend $210 million on the strategic turnaround.

Like Gateway, Dell and Compaq, Micron hopes the shift to selling monthly, recurring services will make up for falling PC prices.

Analysts are now thinking the services subsidiaries could be turned into a whole new company that might eclipse its parent. Analysts from Paine Webber, Bank of America, Robertson Stephens and Buckingham Research Group upped their target price on Micron's stock based on this notion. Micron's stock is up about 80 percent this month and has reached a new 52-week high on investor optimism. The stock was up 43 cents, or 2 percent, at $19.69 at the end of regular trading today.

In a research note issued on Friday, analyst Kurt King of Bank of America Securities upgraded Micron's stock to a "buy" on the growing belief that Micron is, in fact, moving to spin out its Web hosting operations by mid-year. The company also has slated a major announcement for tomorrow.

A representative for Micron declined to comment, saying the company was in a quiet period before reporting earnings next Monday. Currently, the company is expected to post profits of 4 cents per share on March 20, according to consensus analyst estimates compiled by First Call/Thomson Financial.

King, in his note, wrote that Micron's management had mentioned the spin-off possibility late last year, but "didn't get much credit from the market as management hadn't delivered on other initiatives." After a recent investor conference where Micron executives reiterated those plans, King and other analysts started to take the company more seriously.

While the current hardware business is only "so-so," according to King, a newly formed hosting business could potentially double Micron's current valuation if investors treat it as they do hosting companies such as Exodus and Digex. The new company could be worth around $2 billion to 3 billion, compared with Micron's valuation of about $1.9 billion based on today's stock price.

Because of the high costs involved with keeping up with rapid changes in technology, small and medium-sized businesses--which have been at the core of Micron's and Gateway's strategies for years--are expected to change their technology purchasing habits. Instead of buying and owning computer hardware and software, these businesses will pay Micron, or some company similarly situated, a monthly fee to provide them with hardware, backup, Web site hosting, software rental and upgrades, and other services.

Through its acquisitions, Micron already has about 40,000 paid hosting accounts and 70,000 Web sites hosted on its servers.

Research firm International Data Corp. estimates the Web hosting market for small and medium-sized businesses will reach $16 billion by 2004.

The company just opened the second of 12 operations centers for providing hosting services. The site is a former Air Force Missile Command and Control Center opened in the 1950s. The site, in Moses Lake, Wash., was built to withstand a 10-megaton nuclear blast.

Although most of the attention has centered on Micron's hosting business, Robertson Stephens analyst Dan Niles said in his report that he expects Micron to announce a partnership with a large electronics retailer, so the company can have a presence in retail stores.

The deal could be similar to the one announced last month by Gateway and OfficeMax, Niles thinks. In that deal, Gateway will build and staff "store-within-a-store" outlets in more than 1,000 OfficeMax outlets. In turn, Gateway will cross-promote the chain's Web site in return and the two will formulate further promotions in the future.

Micron may not have the clout or money to become an exclusive PC provider with retailers, but in any case, Bank America's King thinks that the deal would help lower Micron's cost of PC manufacturing by requiring factories to run at higher capacity.

Micron could decide to spell out its strategy for spinning off the hosting service in more detail after reporting earnings next week.

 

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