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US-China Trade War Adds to Micron’s Troubles

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Trade war aggravates the memory industry’s troubles

The memory industry is already struggling through a cyclical downturn caused by an oversupply of DRAM (dynamic random access memory) and NAND (negative AND) chips, sluggish demand from semiconductor companies and device makers, and supply shortage at Intel. These troubles have caused a double-digit fall in memory prices on a sequential basis.

The memory industry’s troubles were aggravated in May when the United States and China increased tariffs on each others’ imports to as much as 25% and the United States banned US firms from doing business with Huawei. Huawei is the world’s second largest smartphone maker and a key customer of memory chip makers like Micron Technology (MU) and Western Digital (WDC). Stocks of MU and WDC fell 18.5% and 25.4% between May and June 14, respectively.

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Could Micron’s stock make a new low?

MU and WDC came close to their 2019 lows on June 14 when Broadcom cut its full-year revenue guidance and dampened hopes of a demand recovery in the second half amid the trade war and the Huawei ban. These memory stocks jumped over 5% on June 19 on the slightest hope of easing trade war tensions.

Micron is set to report its fiscal 2019 third-quarter earnings on June 25. The memory and semiconductor industry data points and macroeconomic environment indicate that the overall semiconductor industry is in a downturn with no growth in sight for the rest of the year. Wall Street firms like Nomura and Stifel have lowered their earnings estimate and price target for Micron as the trade war and the chipmaker’s exposure to China create uncertainty in memory pricing.

If Micron reports lower-than-expected earnings and guidance, the stock could fall in the mid-to-high single digits. If the stock falls below its June 14 price of $32, it could reach its 52-week low of $28.4.

Micron: a cyclical stock

Micron is a cyclical stock and is currently in a downcycle. However, it is fairly certain that things will be good again and the company will return to growth in an upcycle. The only real uncertainty is the timing. It is difficult to predict when this down cycle will end. Thus, it makes sense to hold the stock and sell during the upcycle.

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