- China bans Micron Technology chips
- The ban could have limited impact as it mainly applies to the public sector
- Micron invests JPY 500 billion in Japan and receives financial incentives
- Due to the sweltering market, inventory write-downs are squeezing profits
- The company expects stabilization in the fiscal third quarter
- Stocks rise on euphoria after NVIDIA earnings
Micron Technology (MU.US) made headlines earlier in the week after China banned some of the company’s products over safety concerns. This is another chapter in the tech war between the US and China and could impact the company’s sales. However, Micron recently announced a major investment in Japan that could help offset China’s troubles. Let’s take a quick look at the breaking news about the company.
China bans Micron chips
The Cyberspace Administration of China, China’s cybersecurity agency, said in a statement Sunday that some products made by U.S. memory chip maker Micron Technology failed security tests. The agency said that Micron’s products pose a significant risk to the critical information infrastructure supply chain and, as such, companies involved in critical information infrastructure projects should stop using these products.
The measure can be seen as another chapter in the trade war between China and the US and China’s retaliation. The United States has restricted chip exports to China for years and has targeted Chinese tech companies like Huawei over security concerns. There is no doubt that this decision is primarily driven by political motives and less by security concerns. This seems particularly true given that it was announced shortly after the G7 summit, during which G7 leaders voiced concerns about China and called for a reduction in reliance on China in critical supply chains.
The Micron Technologies sales has been under pressure in recent quarters due to oversupply in the memory chip market. Source: Bloomberg, XTB
Limited impact of the Chinese ban?
Although China accounts for about 11% of Micron’s revenue, the company said about a quarter of its revenue comes from direct or indirect sales to Chinese companies. However, the impact of the Chinese ban is actually likely to be much smaller. China has banned the use of Micron chips in national critical information infrastructure projects. This mostly affects the public sector — government and telecom companies — which account for only a fraction of the company’s revenue, as Micron sells mostly to the private sector in China. Although it’s not yet clear how China will define critical information infrastructure, making the impact of the ban difficult to gauge, Micron says a ban could cost annual sales by a “high single-digit” percentage.
Although China accounts for 11% of Micron’s direct sales, the company said direct and indirect sales to Chinese companies combined could account for up to a quarter of its sales. Source: XTB
Micron invests in Japan, Japan offers incentives
Although the Chinese decision to ban the use of Micron chips in critical information infrastructure will negatively affect the company’s business, there has also been positive news for the US chipmaker recently. Micron announced it would invest up to JPY500 billion (about US$3.75 billion) in Japan, with Japan offering the company around JPY200 billion (about US$1.5 billion) in financial incentives.
Micron sees an improved business outlook
Micron Technology’s business has been struggling lately – sales have fallen due to oversupply in the memory chip market and this has also had a negative impact on profits. Micron reported a net loss in the previous two quarters, with a net loss of $2.1 billion in Q2 2023. However, it should be said that this was mainly due to a $1.43 billion inventory write-down. Still, the company expects things to improve going forward. While the Q3 forecast shows no such improvement, it does not point to further deterioration either. Micron expects Q3 results to be more or less flat from Q2 and also to be impacted by inventory write-downs, albeit to a lesser extent (around $500 million). A return to profitability is not expected until mid-2024.
Oversupply in the memory chip market and slowing demand have weighed on Micron’s profits, with massive inventory write-downs weighing on profits. Source: Bloomberg, XTB
A look at the chart
China’s decision to ban Micron products resulted in a nearly 4% bearish price gap in the company’s stock at the start of Monday’s trading on Wall Street. The entire semiconductor sector was under pressure on Monday. However, semiconductor stocks posted strong gains today thanks to a stellar quarterly report from Nvidia released yesterday. Micron Technology (MU.US) will open today’s trading at its highest level since June 8, 2023. From a technical standpoint, the outlook for the company’s stock is bullish as the share price broke the upper boundary of an ascending triangle pattern at the end of the previous week. A classic breakout to the upside from this pattern will point to the possibility of a rally up to $81.50 – a level not seen since late March 2022. However, to reach those levels, the bulls would need to break a medium-term resistance zone in the $74.25 area.
Source: xStation5 by XTB
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