Micron (MU) is the largest US (SPY) manufacturer of DRAM and NAND memory chips. However, the company is facing depleting demand for memory chips. The lower memory chip demand is due to the weak smartphone demand and softness in the PC markets. The declining demand for memory chips caused higher inventory, which led to lower prices for DRAM and NAND memory chips. The US-China (MCHI) (FXI) trade war and a slowdown in China also dented chips’ demand. Advanced Micro Devices (AMD) and NVIDIA (NVDA) are also pressured by excessive inventory.
Margins are hurting
Excessive inventory is denting Micron’s margins and earnings. In the second quarter, Micron’s gross margin contracted by 820 basis points YoY (year-over-year) to 50.2%. The operating margin fell from 49.4% to 36.2% on a YoY basis. The gross margin and operating margin fell from 59.0% and 49.1% in the previous quarter.
Recovery in memory chip demand
Micron expects the memory chip demand to rebound soon. However, the margin recovery might take time due to the excessive inventory pile up. Optimism about positive trade talks between the US and China might impact Micron’s revenues and profits. S&P 500 companies like Qualcomm (QCOM), Qorvo (QRVO), Broadcom (AVGO), and Texas Instruments (TXN) mainly depend on China for revenues. These companies get ~40%–60% of their revenues in China.