The Trade War Is Among the Least of the Headwinds for Micron Stock

Shares of Micron Technology (NASDAQ:MU) were up over 4% on Monday, with MU stock sitting at $45.22 at the close. That almost makes up for the 4.5% loss that Micron suffered on Friday, as the markets, in general, reacted to news that China’s economic growth was slowing.

The Trade War Is Among the Least of the Headwinds for Micron Stock

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In fact, Micron, more than many tech stocks, is deeply affected by what happens in China. Not just in terms of the current tensions, but also when it comes to competition, with Chinese companies preparing to compete against the American chipmaker. 

Micron stock is up a respectable 42.5% in 2019, despite facing many challenges including the trade war with China and depressed prices for DRAM and NAND flash memory. There are some positives in the near future for Micron, but China weighs heavily on its future.

MU Stock and the Trade War

When it comes to American tech companies, very few are more directly affected by the trade war with China than Micron. In 2018, 57.1% of MU revenue came from the Chinese market. Among American chipmakers, that level of exposure is second only to Qualcomm (NASDAQ:QCOM), which received 67% of its 2018 revenue from China.

As a result, MU stock has been on a roller coaster ride through 2019, including a 22% drop through the month of May as tensions between the U.S. and China escalated. Last Friday, after a report was released indicating China’s economic growth has slowed to its lowest level in nearly three decades, Micron stock took a big hit.

The trade war comes at a bad time for Micron, which specializes in the production of memory products used by smartphones and PCs, including DRAM and NAND flash memory. That business is cyclical in nature, and with smartphone sales stalled and PC sales continuing a slow decline made worse this year by a shortage of some Intel (NASDAQ:INTC) processors.

The Intel shortage resulted in market changes that produced a glut elsewhere. That market glut and resulting price pressure explains why MU stock has fallen 26% since hitting five-year highs last May. The stock has since been recovering from a crash that saw it drop from over $61 last May to the $30 level by mid-December.

Micron’s Biggest Market Could Become Its Biggest Competition

While the trade war with China has hurt Micron, that country poses a far bigger threat to MU stock in the long term.

With so many of its products reliant on memory chips produced by Micron, along with South Korea’s Samsung and SK Hynix, China has been determined to ramp up domestic production.

In 2015, Chinese company Tsinghua Unigroup Ltd was preparing an offer to buy Micron for $23 billion. But any such deal would have had to clear U.S. government approval.

“Having a strong domestic maker of that [chip] technology is something that’s of strategic value to the United States,” Professor John Villasenor with UCLA’s Anderson School of Management told the LA Times. 

The prospect of the deal sent MU stock up 11% when news of the potential deal leaked, but of course, it never happened.

Since that time, China has ramped up efforts to build its own factories. In June we reported that China’s Changxin Memory was poised to begin mass production of DRAM. If China’s effort to build DRAM and NAND factories pays off, the result is likely to be extended pressure on global memory prices and the decimation of Micron’s Chinese sales.

And remember, in 2018 that market accounted for 57.1% of Micron’s revenue… At least one industry analyst thinks the situation could get bad enough that one of the traditional DRAM producers — Samsung, SK Hynix or Micron — could collapse or be acquired. 

In other words, when Chinese DRAM and NAND factories come online and start producing in volume, the price pressure MU has faced during the current memory chip glut will seem like nothing. And that is likely to have a profound effect on MU stock.

As InvestorPlace’s Faisal Humayun points out, AI and data center growth will result in strong demand for memory chips going forward. Good news for Micron. However, if you’re looking at an investment in Micron stock for the long term, don’t forget about the risk(s) posed by China.

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

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