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China Risk Makes Micron Stock Uninvestable Right Now

Micron's earnings are set to slump as the trade war drags on

It’s been an exciting week on the trade war front. On Friday, the stock market plunged. This came after China increased tariffs toward the U.S. and President Donald Trump responded with his own escalation in tariffs, along with referring to China’s leader as an “enemy” of the United States. On Monday, however, Trump partially walked back Friday’s comments and suggested that China is still eager to make a deal.

Favorable Tailwinds Say Micron Stock Finally Is Worth the Risk
Source: Charles Knowles / Shutterstock.com

While these day-to-day gyrations can be frustrating for long-term investors, if you own Micron (NASDAQ:MU) stock, the political developments are of utmost importance.

Simply put, Micron stock isn’t going to be a big winner until the market knows what will happen to all of Micron’s Chinese customers.

Micron Stock Highly Reliant on China

Why is China so important to the outlook for the Micron stock price? Heading into 2019, China revenues accounted for more than 55% of Micron’s overall sales. This isn’t a new development either. Since 2010, Micron has derived significantly more revenues from China than either North America or Europe. The company’s reliance on China has grown even stronger in recent years as China’s low-end smartphone makers have boomed.

It’s hard for Micron to maintain stable revenues, let alone deliver significant growth if China is sluggish. And given the past week’s developments, it’s very difficult to be bullish on Chinese electronic sales for the rest of the year.

Interestingly, while MU stock has held up fairly well this summer, investors have been quick to sell Apple (NASDAQ:AAPL) stock. Apple, you may recall, hit $230 last fall. It has never gotten back to that level this year, as various rallies have stalled out around $210 per share or so. On Friday, in just one trading session, Apple stock plunged $10 per share off that resistance level as folks priced in the probability of weakening iPhone sales. And that, in turn, will have negative consequences for Micron’s stock.

Micron Losing Revenues to Companies Like Huawei

To build on that point, consider Huawei. The company has taken all sorts of hits this year, including a key executive being arrested in Canada. The U.S. has made Huawei a prime example of China’s questionable trade practices and threats to American national security.

That’s very bad news for Micron stock. Remember that in 2018, Huawei alone accounted for 13% of Micron’s revenues. With Huawei now a pariah in the west, those revenues are on hold indefinitely.

It doesn’t just stop at smartphones either. Consider that Huawei was supposed to be the global leader in 5G deployment. The U.S. and Europe are trying to figure out how to adjust their 5G deployment strategies without Huawei. It seems likely that 5G’s rollout will be significantly slowed down with Huawei largely out of the picture. That, in turn, will reduce demand for Micron’s new generation of chips specifically designed for higher performance to meet the demands of 5G devices.

Trade War Creates Potentially Permanent Competition

In addition to hitting end demand for memory chips, the trade war appears to be creating trouble for MU on another front. The newest issue is that a Chinese firm is about to start manufacturing its own DRAM memory chips to circumvent the tariffs and potential sales restrictions on American goods.

This Chinese firm, Changxin Memory, has reportedly spent $2.5 billion on its own memory-making production capabilities. Meanwhile, it based its technology on IP from a German source. This will allow Changxin to avoid any troubles related to American patent law or charges of trade secret theft.

If Changxin or other Chinese firms secure a large portion of the memory market, it could be a permanent blow to Micron stock. Even once the trade war ends, if Chinese firms can buy memory chips locally, they will have much less incentive to return to Micron’s supplies in the future.

MU Stock Verdict

For the remainder of 2019, at least, it’s hard to see MU stock diverging from the broader Chinese relations theme. That’s going to be a problem for Micron stock owners because there simply isn’t good reason to expect a trade deal all that soon. President Trump can try to smooth things over, but Friday’s tweets seemed to point to a longer, more drawn-out stand-off than markets had previously expected.

And let’s face it. If you bought MU stock at $60 in 2018, the past year has been unpleasant. Micron really hasn’t fared that badly lately. In fact, Micron stock is up 35% year-to-date. Things could be a lot worse.

And, if relations don’t improve with China soon, that’s probably the direction things will go for Micron stock as well. Analysts see earnings dropping to just $2.54 per share for Micron over the next 12 months. That makes Micron stock, at almost 17x forward earnings, hardly cheap given the geopolitical headwinds.

At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.

Article printed from InvestorPlace Media, https://investorplace.com/2019/08/china-risk-makes-micron-stock-uninvestable-right-now/.

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