Micron (MU +4.44%), the third-largest maker of DRAM in the world, has lost more than 40% of its value over the past 12 months as memory chip prices have tumbled. DRAM prices fell nearly 30% during the first quarter of 2019, according to DRAMeXchange, marking the industry's steepest decline since 2011.
Last quarter, Micron estimated that its DRAM shipments would bottom out in the second half of 2019 before recovering in 2020. However, the Trump administration's escalating war against Chinese tech giant Huawei indicates that forecast might be too rosy.
Image source: Getty Images.
DRAMeXchange believes the U.S. government's moves to block companies from doing business with Huawei could cause global DRAM prices to fall 15% during the third quarter as Huawei's smartphone and server businesses face "heavy obstacles for the next two to three quarters.''
The industry is already struggling with a global glut of DRAM chips, sluggish demand from device makers, and an ongoing chip shortage from Intel that's throttling PC sales. The battle against Huawei, the world's second- largest smartphone maker, could exacerbate that pain.
Why China is causing headaches for Micron
Micron generates most of its revenue from DRAM and NAND (flash) chips, making it a "pure play" on the cyclical memory chip market. Micron is also increasingly dependent on China. Its revenue from Chinese customers rose 67% in 2018 and accounted for 57% of its sales, compared to 51% in 2017 and 43% in 2016. Sliding memory prices, the decline of the Chinese smartphone market, and the slowdown in the Chinese economy all took a toll on Micron over the past year:
|
Metric |
Q2 2018 |
Q3 2018 |
Q4 2018 |
Q1 2019 |
Q2 2019 |
|---|---|---|---|---|---|
|
Revenue |
$7.4 billion |
$7.8 billion |
$8.4 billion |
$7.9 billion |
$5.8 billion |
|
Change (YOY) |
58% |
40% |
38% |
16% |
(21%) |
YOY = year-over-year. Source: Micron quarterly reports.
To make matters worse, Chinese chipmakers are aggressively developing their own memory chips as part of a broader push to reduce the country's dependence on overseas technologies.
Image source: Getty Images.
The U.S. government has accused a Chinese state-owned company and its Taiwanese partner, UMC (UMC +0.37%), of stealing trade secrets from Micron. The chipmakers then brazenly sued Micron over patent infringement claims last year, and demanded that it stop selling certain types of DRAM and NAND chips in China.
Chinese regulators lent support by launching antitrust probes against Micron, Samsung, and SK Hynix (NASDAQOTH: HXSCL). Those moves clearly indicate that China wants to push foreign memory chipmakers out of the market and it could flood the market with Chinese-made chips, which would exacerbate the global supply glut and depress market prices.
Those headaches will get much worse
Micron generated 13% of its revenue from Huawei in the six months ending in late February. Micron halted memory chip shipments to Huawei at the end of May, and that suspension could last indefinitely as the trade war escalates into a tech war that will exacerbate the global oversupply of memory chips and drive down market prices.
The Huawei conflict will also encourage China's state-backed chipmakers to accelerate the development of domestic memory chips, which could increase corporate espionage and lock foreign chipmakers like Micron, Samsung, and SK Hynix out of the market permanently.
Micron might look cheap at 7 times forward earnings, but no one wants to buy a cyclical stock before it bottoms out. Micron's prospects already looked dim, but the war against Huawei is now stamping out any flickers of hope for a sustainable recovery.
