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Micron Technology (MU) and other semiconductor companies started to recover in September when China confirmed that it would no longer react. This was a positive step in the US-China trade negotiation process. MU's actions are sensitive to trade war because of their high exposure to China. Micron and the VanEck Vectors Semiconductor (SMH) ETF increased by 8% and 9% respectively from September 3rd to 20th.
Micron and its exposure to China
MU derives 50% of its revenue from China, about 17% of which is Huawei. In May, the United States imposed a trade ban on Huawei, which was later eased. In addition, most of Micron's facilities are located outside the United States – in Taiwan, Singapore, Japan and China.
The big question is whether the recovery of Micron marks the beginning of the resumption of the actions or if it is only the silence before the storm. The answer is subject to the end of the trade war with China.
If the trade war subsides, this recovery could be the beginning of the recovery of the memory market. If the trade war gets worse, this gathering is a false alarm. In this article, we will examine both scenarios and the probability that they will materialize.
The price of Micron shares is directly proportional to the prices of DRAM (dynamic random access memory) and NAND (AND negative), which are governed by the forces of supply and demand. When the trade war between the United States and China began in 2018, it had an impact on the technology sector, semiconductors in particular.
Since May, the United States has imposed 25% tariff on Chinese imports at 25% and 15% on 125 billion dollars of Chinese imports. This has brought some Micron components and some products using Micron chips into the tariffs.
The triple impact of China's trade war on Micron
Micron listed the trade war as a business risk in his statements to the SEC and listed the triple risk that the trade war presented for his company. The first element of the trade war risk was the direct impact of tariffs on products imported or exported to China.
The tariffs made its products expensive, which put them at a disadvantage compared to their South Korean competitors Samsung and SK Hynix. However, Micron has shifted its production from China to other countries to save on tariffs. This resulted in the cost of the transfer operations.
The most important blow came from the second element of commercial war risk, namely the indirect impact of tariffs on consumer demand. The trade war brought Micron's customer products into the bandwidth.
Uncertainty surrounding the trade war has reduced the demand for products such as servers, personal computers, smartphones and SSDs using Micron chips. Companies began manufacturing with caution and stopped buying memory chips, which affected Micron's orders. The reduction in demand for finished products led to a decline in Micron's average sales price (ASP) and sales.
The third element of the risk of trade war comes from trade barriers such as trade bans or product restrictions that can be provided. Following the US ban on Huawei in May, Micron recorded a $ 40 million reduction in inventories, specifically designed for Huawei in the third quarter of fiscal 2019.
China has threatened to restrict trade in the rare earth minerals needed to make memory chips. Files filed by Micron with the SEC indicate that if this threat materializes, the company's ability toproduce products, increase our selling and / or manufacturing costs. "
Micron takes advantage of the trade war between Japan and Korea
South Korean rivals are exposed to this risk, Japan limiting the export of three chemicals used in the manufacture of memory chips in Korea. Samsung and SK Hynix accounted for over 60% of the global memory offering last year.
Nikolay Todorov, a Longbow analyst, said the Japanese-Korean problem had reduced the supply of memory. As a result, excess inventories of memory chip manufacturers are declining faster than expected.
When could the trade war with China be mitigated?
If the trade war with China were to subside, Micron would be freed from the triple risk of uncertainty in demand and trade. This brings us to the following question: will the trade war intensify or abate? When could a trade agreement be concluded?
The trade war has reached a level where all imports and exports between the United States and China are subject to a tariff. This situation has begun to slow the economies of both countries and the global economy in general. The presidents of both countries are facing international pressure from a coalition of Australia, Canada, Singapore and Indonesia.
With the US elections scheduled for next year, President Trump may not want to put the economy into recession. In addition, China is showing its willingness to negotiate. Although we see signs of easing the trade war, it is still uncertain that the war could get worse. It's this uncertainty that keeps analysts and investors on their guard.
According to a September 10 article published in The streetWeston Twigg, an analyst at KeyBanc, sees the "first signs" of a memory chip recovery. DRAM and NAND stocks are down and NAND prices are rising steadily. DRAM price declines are slowing and should stabilize by the end of the year.
The offer is well managed with few players and high barriers to entry. What needs to be improved is the demand. Twigg wrote: "Unless there is a recession, we expect that memory trends will improve by 2020," as long-term demand drivers emerge.
Another argument that we can note is the duration of a cyclical slowdown. Historical data has shown that a slowdown in the industry lasts about 12 to 16 months. Micron is currently in its tenth month of the current slowdown, and we can expect the slowdown to end in early 2020.
Investor takeaways
Micron's stock rallied in June and in July, trade tensions subsided. The stock then dropped in August, as the trade war intensified with new rates. It rebounded again in September with the appearance of new signs of easing. This roller coaster ride shows that even though the Micron stock has growth potential, it is conditional.
Micron is not like NVIDIA or Intel, which should appreciate in the long run. This is a cyclical stock where the investor is gaining profits. As a result, the stock has limited upside potential. The stock is currently trading near its 52-week high. This is a good time to keep the stock for those who already have a position.
However, the stock could decline significantly if the trade war with China accelerates or fears of recession materialize. If any of these events occurred, this could open a buying opportunity for investors. As a general rule, buy when memory prices are down and sell them when memory prices are up. It's easier said than done.
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