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Rich Asplund

Micron Technology Faces Headwinds from China

Micron Technology (MU), the largest U.S. maker of memory chips, is facing a new headwind from China just as the company is recovering from a demand slump. Micron Technology had rallied nearly +40% this year amid optimism the worst is over after memory chip inventories surged following a drop in sales of personal computers and other devices. However, these new restrictions in China threaten the company’s recovery.   

On Sunday, the Cyberspace Administration of China (CAC) warned operators of key Chinese infrastructure about buying chips from Micron Technology, saying it had found “relatively serious” cybersecurity risks in Micron products sold in the country.  The CAC said the components caused “significant security risks to our critical information infrastructure supply chain,” which could affect national security.  However, the U.S. Commerce Department said China’s conclusion had “no basis in fact” and was retaliation for the G-7 stance on limiting technology transfers to China.

Although Micron Technology gets only about 10% of its total revenue directly from China, the country has many factories that produce a large share of the world’s electronic devices, adding potential complications to Micron’s supply chain and customer relationships.  Micron Technology fell nearly -3% Monday on the news of Chinese restrictions, which may aid the company’s rivals, such as South Korea’s SK Hynix.

Micron Technology was in the process of turning around its business after two consecutive quarters of net losses.  It provided better-than-expected sales guidance for Q3 on the back of improving supply-demand balance in the global chip glut and more job cuts.  Also, Bloomberg News last Thursday reported the company is poised to land about $1.5 billion of financial incentives from the Japanese government to make next-generation memory chips in Japan.  The optimism in Micron’s recovery helped lift the company’s valuation to 3.7 times projected revenue for the next 12 months from a low of about 1.5 times in June of 2022.

After China’s move to restrict the use of Micron Technology’s products, Micron CFO Murphy said China’s actions would reduce the company’s revenue by low-single to high-single digit percentage.  He said that about 25% of revenue, in the form of direct and indirect sales through distributors, comes from China-headquartered companies.  Last month, Stifel had predicted a rally of 10-20% in Micron based on improving sentiment about supply and demand dynamics in the memory chip market.  However, on Monday, Stifel said, “Given the unfavorable conclusion of the review, we believe the short-term trade here has concluded.”

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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