Micron Stock Is in the Crosshairs As China Threatens Its DRAM Business

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Micron (NASDAQ:MU) has been having a less than stellar 2019. At this point one year ago, MU stock was trading near $60. On Friday, it capped a week of losses with Micron stock closing at $32.66, sliding another 2.16%. The company is being hit by the usual cyclical nature of the DRAM business, its primary revenue generator. But what’s spooking many investors is the China effect.

Micron Stock Is in the Crosshairs As China Threatens Its DRAM Business

Source: Micron

This is something relatively new, and what’s making it even worse for MU than other U.S. chipmakers is that the trade war has spurred Chinese competition that will end up eating into its core business even when the current spat is over.

The Cyclical Nature of DRAM

Dynamic random-access memory is a key component of technology ranging from computers to smartphones to smart cars. American chipmaker Micron is the world’s third-largest supplier of DRAM, after a pair of South Korean companies: First-place is Samsung and second-place is SK Hynix. DRAM is Micron’s core product, and primary source of revenue.

Most investors in MU stock recognize that the DRAM market tends to be cyclical in nature. Demand for the products that rely on the component goes up and down, that has a big impact on MU revenue. In 2017, global demand for DRAM was high, as companies like Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google expanded their server capacity in the race for artificial intelligence dominance. High demand pushed up DRAM prices, and revenue for companies like Micron. As a result, MU stock was approaching the $50 level as 2017 closed out. The party continued in early 2018 — Micron stock topped $61 — before the bottom began to fall out of the DRAM market.

With smartphone sales beginning to decline, the shortage of DRAM turned into a glut and prices fell. When Micron reported its Q2 2019 earnings, DRAM prices had declined over 20% from the previous quarter and demand was down. As a result, its DRAM revenue dropped from $5.2 billion in Q2 2018 to $3.74 billion. DRAM demand is expected to recover — remember it’s a cyclical business — but not until into 2020.

MU Stock Hit by the Trade War

Roughly half of Micron’s revenue comes from the Chinese market. The company said earlier this year that China’s Huawei alone accounts for 13% of its annual revenue. 

As the trade war with China heats up, more of MU’s revenue is at risk — its DRAM gets more expensive for Chinese companies to buy, it’s not allowed to sell at all to some, the Chinese government may push some customers to buy from non-U.S. suppliers and reduced demand in the U.S. for the final products further reduces demand for DRAM.    

As the trade war with China escalated in May, MU stock dropped nearly 25%.

China’s Changxin Memory a Long-Term Threat for Micron Stock

The latest blow to Micron stock is again related to China. Last week the Nikkei Asian Review reported that China’s Changxin Memory is on the verge of becoming the country’s first mass-producer of DRAM.

The company has invested $8 billion in a new chip plant, and is using a new design for its DRAM based on a bankrupt German chipmaker — thus avoiding U.S. charges of intellectual property theft. Initial production is expected to be 10K wafers a month, which is a drop in the bucket compared to the 1.3 million wafers currently produced globally. However, when Changxin Memory ramps up production its output could add to the global DRAM glut, further lowering already depressed prices. And as a native Chinese producer of DRAM, it is positioning itself to replace America’s Micron as a supplier for Chinese tech companies like Huawei.

There’s nothing but downside for MU stock in that news, which goes a long way toward explaining Friday’s drop. 

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Brad Moon has been writing for InvestorPlace.com since 2012. He also writes about stocks for Kiplinger and has been a senior contributor focusing on consumer technology for Forbes since 2015.


Article printed from InvestorPlace Media, https://investorplace.com/2019/06/micron-stock-is-in-the-crosshairs-as-china-threatens-its-dram-business/.

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