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Bear of the Day: Micron (MU)

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Micron Technology ((MU - Free Report) ) became a Zacks #5 Rank this spring as EPS estimates collapsed for the current fiscal year, which ends in August, from a loss of $2.28 to a loss of $4.71.

That earnings drawdown would represent a 156% annual decline for the "megalodon of memory" if it unfolds as projected.

What many investors don't realize is how integral Micron memory innovations are to the AI revolution across multiple platforms including mobile, autos, medicine, robotics and the datacenter.

Besides the traditional volatility of commoditized memory chips and supply chain constraints, which delivered a 189% EPS miss for the February quarter, Micron has been dealing with higher pressure from China.

Sales restrictions on Micron's products in China can be seen as a retaliatory action by the red state against the U.S. government's increasing restrictions on Chinese access to advanced semiconductor technology.

Here's an excerpt from our May 22 reporting...

Micron Faces Restrictions for Selling Products in China

Micron has been imposed with a trade restriction by the Cyberspace Administration of China on selling its products in key domestic industries on national security concerns. In a statement, China’s cybersecurity regulator revealed that the U.S.-based memory chipmaker has failed to pass a cybersecurity review, which it had initiated in late March 2023.

The development can be seen as a retaliatory action by the Chinese government against the U.S. government’s increasing restrictions on Chinese access to critical and more advanced semiconductor technology.

In October 2022, the United States imposed an export ban on certain advanced chips that are used in data centers for artificial intelligence, data analytics and computing applications. Over the past few months, the Netherlands and Japan also joined the United States to restrict China from making advanced chips.

The tit-for-tat actions could jeopardize Micron’s prospects, which are already facing the brunt of the weak demand for its memory chips. Chip sales in China make up approximately 11% of Micron’s total revenues.

In late March, Micron reported weaker-than-expected financial results in the second quarter of fiscal 2023. The company reported a non-GAAP loss of $1.91 per share, which was significantly higher than the Zacks Consensus Estimate of a loss of 67 cents. The bottom line compared unfavorably with the prior-year quarter’s earnings of $2.14 per share.

The quarterly revenues of Micron plunged 53% year over year to $3.69 billion, which missed the consensus mark of $3.76 billion. The rapidly weakening consumer demand and substantial customer inventory adjustments across end markets amid macroeconomic uncertainty were the main reasons behind the dismal quarterly performance.

The memory chip maker has offices in Shanghai and Shenzhen and a chip packaging facility in the city of Xian. In early 2022, Micron announced that it would shut down DRAM design operations at its Shanghai facility by the end of the year. The move was seen as a strategic shift from the manufacturing of chips back to the United States amid mounting trade tensions between the United States and China.

But MU is not the only semiconductor company that has been impacted by the tech war between the world’s two largest economies.

On Aug 31, 2022, NVIDIA (
(NVDA - Free Report) ) disclosed that the U.S. government informed it on Aug 26 about imposing a new licensing requirement, effective immediately, for its A100, A100X and forthcoming H100 integrated circuit sales in China and Russia. The government also banned NVIDIA from exporting DGX or any other systems that incorporate A100 or H100 integrated circuits.

The new licensing requirements will also be implied for any future chip designs developed by NVIDIA that have a threshold greater than or equivalent to A100. Additionally, any systems developed in the future incorporating the aforementioned types and thresholds will fall under export restrictions.

Bottom line: MU appears a strong value near $65 as it trades under 4X forward sales projections of $20 billion. We just need to see how this cycle plays out with new pressure from China. The Zacks Rank will let you know.

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