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Action of the Week – Micron Technology

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  • China bans Micron Technology chips
  • The ban may have a limited impact as it mainly affects the public sector
  • Micron to invest 500 billion JPY in Japan and receive financial incentives
  • Inventory write-offs amid increases due to excessive market pressure
  • The company expects stabilization in the third fiscal quarter
  • Stocks rise amid euphoria fueled by NVIDIA results

Micron Technology (MU.US) hit the news headlines earlier in the week after China banned some of the company’s products for safety reasons. This is another chapter in the tech wars between the US and China and could affect the company’s sales. However, Micron recently announced a major investment in Japan, which could help offset the problems in China. Let’s take a quick look at the latest news about the company.

China bans Micron chips

The Cyberspace Administration of China, China’s cybersecurity regulator, said in a statement on Sunday that several products from Micron Technology, a US memory chip maker, failed security tests. The regulator said Micron’s products pose a significant risk to the critical information infrastructure supply chain and therefore companies involved in critical information infrastructure projects should stop using them.

The move can be seen as another chapter in the Sino-US trade war and as a retaliation by China. The United States has been restricting chip exports to China and targeting Chinese technology companies such as Huawei for security reasons for years. To be sure, the decision is motivated primarily by politics rather than security concerns. This seems especially true given that it was announced shortly after the G7 summit where G7 leaders raised concerns about China and called for less reliance on China in supply chains vital.

Micron Technologies’ sales have been under pressure in recent quarters amid a weak market for memory chips. Source: Bloomberg, XTB

The limited impact of the Chinese ban?

Although China accounts for about 11% of Micron’s revenue, the company said that about a quarter of its revenue came from Chinese companies in the form of direct or indirect sales. However, the impact of the Chinese ban is likely to be much smaller. China has banned the use of Micron chips in national critical information infrastructure projects. This is an area mainly limited to the public sector (government and telecommunications companies) which represents a fraction of company sales, as Micron sells mainly to the private sector in China. While it is still uncertain how China will define critical information infrastructure and therefore difficult to measure the impact of the ban, Micron says a ban could be as expensive as a “high single digit” percentage of annual revenue.

While China accounts for 11% of Micron’s direct sales, the company said direct and indirect sales to Chinese companies combined can account for up to a quarter of its revenue. Source: XTB

Micron invests in Japan, Japan offers incentives

While China’s decision to ban the use of Micron chips in critical information infrastructure will have a negative impact on the company’s business, there has also been some positive news for the US chipmaker recently. That is, Micron announced that it will invest up to JPY 500 billion (about $3.75 billion) in Japan, and Japan will offer about JPY 200 billion (about $1.5 billion) in financial incentives to the company.

Micron sees better prospects for its business

Micron Technology’s business has been struggling lately: sales have been falling amid crowds in the memory chip market and it’s also had a negative impact on results. Micron reported a net loss for the previous two quarters with a net loss in the second fiscal quarter of 2023 of $2.1 billion. However, it must be said that it was mainly due to an inventory reduction of $1.430 million. However, the company said it expects things to improve in the future. While guidance for the fiscal third quarter shows no such improvement, it does not indicate further deterioration. Micron expects fiscal third quarter results to be broadly unchanged from the fiscal second quarter and to also be impacted by inventory reduction, albeit to a lesser extent (about $500 million). A return to profitability is not expected until mid-2024.

A glut in the memory chip market and weakened demand for Micron’s results contributed to a massive inventory write-down pressuring earnings. Source: Bloomberg, XTB

Look at the graph

China’s decision to ban Micron products resulted in a nearly 4% bearish price gap on the company’s shares at the start of Monday’s cash trading on Wall Street. The entire semiconductor sector was under pressure on Monday. However, strong gains can be seen in semiconductor stocks today, thanks to Nvidia’s stellar earnings report released yesterday. Micron Technology (MU.US) Today’s session is planned to open at the highest level since June 8, 2023. From a technical point of view, the outlook for the company’s shares is bullish with the share price breaking the upper limit of an ascending triangle pattern at the end of the week before that . A textbook range breakout of this pattern indicates a possible move higher to $81.50, a level not seen since late March 2022. To reach these levels, however, bulls would need to break above a midpoint – Zone initial resistance at $74.25 an. area.

Source: xStation5

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