How Will The Chinese Chip Ban Impact Micron?

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Micron Technology

The Chinese government has barred the use of Micron Technology (NASDAQ: MU) products in key infrastructure applications in the country, citing national security risks, causing Micron stock to decline by about 3% in trading on Monday. So what is driving the ban and how big of an impact will it have on Micron’s business? The move is viewed as a retaliation of sorts for the export controls the U.S. has imposed on advanced semiconductors products in China. Micron’s memory chips could be viewed as a soft target of sorts in the semiconductor trade war, given that China likely has multiple alternatives to source DRAM and NAND memory chips from other suppliers from around the region, unlike logic chips and graphics processors that have a more limited pool of more specialized suppliers. So how will this move impact Micron? Micron derived about 11% of its total revenue from mainland China in 2022. This number increases to close to 16% if we also include Hong Kong. Moreover, Qualcomm has previously disclosed that it also supplies to distributors that sell to China-headquartered companies. Including these indirect sales, the company’s total exposure to China could amount to close to a quarter of Micron’s total revenues. Now, although the current ban applies only to big Chinese institutions such as banks and telecom networks, this could impact Micron’s brand image in the country leading to slower demand from the broader consumer space. Overall, Micron has indicated that it expects a revenue hit to the tune of a low-single to high-single-digit percentage.

The restrictions in China come at a time when Micron’s recent financial performance has been tough. Over Q2 FY’23 (fiscal year ends August) revenues fell by 52% year-over-year, as average realized prices for both DRAM and NAND declined about 20% sequentially.  Demand from key markets, such as mobile and PCs, fell considerably, just as industry supply continued to grow. Overall demand growth for 2023 is also expected to be muted, with the company forecasting approximately 5% growth for DRAM – which sees relatively inelastic demand – and a low-teens percentage growth for NAND. Micron is guiding for a 55% year-over-year drop in revenues at the mid-point for its fiscal third quarter (ending May) as well. However, the markets are looking ahead toward recovery. The memory market could see improved supply-demand balance from the second half of this year, with major manufacturers including Samsung, SK Hynix, Micron, Western Digital, and Kioxia cutting production, in a move that could help to stem the decline in DRAM and NAND prices. Demand for PCs and smartphones could also be bottoming out, helping to revive demand to an extent. For perspective, PC sales declined by about 30% year-over-year in Q1 CY’2023, per Gartner, it’s likely that things will get better in the back half of this year, as excess inventories are absorbed over Q2 CY’2023. This could help to blunt the impact of the Chinese ban, to an extent. Moreover, the advent of generative AI tools such as the popular ChatGPT is also likely to drive up memory demand since these algorithms typically require more storage and RAM resources compared to other types of algorithms.

So, is Micron stock a buy at current levels of about $66 per share? We don’t think so. Micron’s valuation still appears rich, with the stock trading at about 100x forward earnings. There are also concerns about the global economy, amid high-interest rates and relatively stubborn inflation, which could weigh on consumer electronics sales, delaying the recovery in demand for memory players.  We remain slightly negative on Micron stock with a $59 price estimate which is about 13% below the current market price. See our analysis of Micron’s valuation: Expensive or cheap for more details.

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 Returns May 2023
MTD [1]
YTD [1]
Total [2]
 MU Return 3% 33% 202%
 S&P 500 Return 1% 9% 87%
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[1] Month-to-date and year-to-date as of 5/23/2023
[2] Cumulative total returns since the end of 2016

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