- The 2019 growth rate of Micron’s China segment revenue, around 57% of the total revenue, is at risk after Apple warned of a Chinese slowdown, citing lower smartphone sales.
- Being a near-commodity company, Micron’s China revenue becomes increasingly correlated with other segment revenues. This is not a good news in a downcycle.
- The negative China impact on Micron's revenue may be further extended if it is spilled over to the rest of the world.
- Due to China slowdown, coupled with weakened DRAM/NAND prices, Micron is expected to lower its 1H 2019 revenue guidance.
- The good news is that most Micron’s suppliers and customers, also issuing downside Q1 revenue guidance, already see a better 2H 2019.
To start with, this is not a post about Micron Technology (NASDAQ:MU) vs. UME or the U.S. vs. China.
There seems to be no shortage of worry among Micron's suppliers, competitors, and customers over the near-term outlook of the semi and memory chip excess inventory. In its Q4 earnings announcement (ER), Taiwan Semiconductor Manufacturing Company (TSM) guided its Q1 revenue down 14% as the largest drop in a decade, citing the sudden drop in high-end smartphone sales, which caused "quite a lot" of inventory congestion. The company expects weak demand to continue until new smartphones launch in 2H19. On January 23, SK Hynix (OTC:HXSCF) reported its Q4 financials that segment margins fell sequentially anywhere between 7% and 12% on weak smartphone sales and suppliers trying to reduce inventory, and the number of inventory days were up to 40 days from 29 days in prior quarter. Overhanging chip inventory is real.
On the customer side, for the first time, Apple (AAPL) CEO Tim Cook cut Q1 revenue guidance, citing poor iPhone sales in China. The fear of a looming recession was further confirmed by Samsung Electronics' (OTCPK:SSNLF) subsequent guidance of a lower quarterly operating profit for the first time in two years, as a slowing Chinese economy also erodes demand for its chips and handsets. In a recent CNBC interview, Advanced Micro Devices' (AMD) CEO Dr. Lisa Su mentioned that "we are seeing some loss of revenue from China." In a truly daring and symbolic pre-announcement (-14%), Nvidia (NVDA) cuts its Q4 guidance on weaker sales of its gaming and datacenter platforms, blaming deteriorating macro conditions, particularly in China, for customers delaying orders. Finally, the worrisome Q2 2019 guidance from Micron's CEO Sanjay Mehrotra didn't help either. It included news that the tariffs would squeeze profit margins, and it would take "three to four quarters" to adjust to the tariffs.
In addition to the common headwinds of China slowdown, Micron has its unique issue. Just like crypto-related demand has been attributed to the rise and fall of AMD and Nvidia share prices, the DRAM/NAND demand/supply mismatch has been the source of Micron's stock price volatility. While it has been estimated that DRAM/NAND will recover in 2H 2019, Micron's sharp reactions to Apple's non-DRAM warning may suggest another possibility that China's slowdown can quickly proliferate from the supply chain through the demand chain and turn into a global slowdown, considering that Micron generated more than 50% its revenue from China. In this post, I look into the impact of the China economic slowdown on Micron's revenue in 2019.
Micron's China Relevance
You would assume that when talking about China, tariffs affecting Microns supply chain or import cost must be the obvious starting point. However, it has been developed in many previous posts that the tariff impact may be mitigated, as most CEOs claimed. The issue of interest here is on the demand side of the equation. If China, one of Micron's major customers, is experiencing a significant slowdown, a natural and direct question is that if Micron's future revenue will be affected.
To answer this question, first, I want to examine how important China is to MU in terms of size of the relationship. Historically, most of Micron's revenue comes from four geographical segments: China (57%), the U.S. (12%), Europe (7%), and Taiwan (5%) (Figure 2). China has been the largest source of revenue booked since 2008. In 2018, China's revenue has once reached near $17.36 billion or 57% of MU's total revenue (Figure 1 and Figure 2).
Furthermore, if Taiwan is added into the Greater China segment, the "Asia influence" cannot be underestimated because it would account for close to 62% of MU's revenue. Other than its growing size, China's presence becomes even more relevant as the economies in the rest of the world become increasingly more correlated with China's economy. Therefore, China's recession will not be confined to China. In fact, from Micron shareholders' perspective, Asia's impact on company's revenue is much more important than the U.S. or Europe's impact combined, as Micron's total revenue growth is more affected by Asia's revenue growth than by the U.S. revenue growth (Figure 3). Furthermore, as a typical property of a "pseudo" commodity company, Micron's all segment revenue growth is highly correlated with each other. The drastic increasing Chinese connection (Figures 2), in terms of both growing sizes and correlation, can easily be explained both by the largest bitcoin mining farms located in Asia (China), and China's 2025 "Made in China" plan where semiconductors are the focus industry.
The Chinese Slowdown Can Be Contagious
The real question is that, if China's slowdown was blamed for part of Micron's Q3 revenue downside guidance, the potential damage to Micron's shareholders will not be the end of it. Considering that Micron's Chinese revenue growth has been practically perfectly correlated with every segment revenue (Figure 3), China's slowdown in demand or trade war weakness may soon be transmitted to the U.S. in the form of global recession. As seen obvious in Figure 3, China and the rest of other segment revenue growths, which were not perfectly correlated prior to 2008, have become almost perfectly synchronized. That is surely not good news in a down cycle.
The recent common movement may likely be a result of the DRAM demand weakened as triggered by slowing smartphone demand in China. Micron also starts seeing the impact of CPU shortages. But the increasing correlation in recent years becomes worrisome. As the DRAM effect lingers on, the China/US/Europe correlation begs a real possibility that China's declining demand will turn into U.S.' declining demand and Europe's declining demand (Figure 5 and Figure 6), albeit to a lesser degree. Therefore, the negative China impact on Micron's total revenue will be further compounded, considering that Micron still has close to 20% of revenue from the U.S. and Europe.
The End of the Tunnel?
On the other hand, there are several glimpses of hope to Micron's shareholders:
- Most Micron's suppliers and customers, issuing downside Q1 revenue guidance, already see a better 2H 2019.
- The main driver for the Chinese slowdown, smartphone demand, is also expected to improve in 2H 2019.
- Since the root of the current China issue is on the trade dispute between the U.S. and China, President Trump is meeting with China Trade representative Liu He in the White House as I am writing this post. Trump said that the principle of the trade deal will be agreed by March 1, the details may be settled after the deadline.
Finally, in the last two trading sessions, after a generally unimpressive Q4 ER (a revenue miss, an in-line EPS, and a significant downside Q1 guidance), Micron's customer, AMD, still managed to surge more than 30%. The Street wisdom justifies the increase as "not as bad as Nvidia's pre-warning has suggested," "the market has priced in the worst," and "AMD's downside guidance is not as bad as the pack." Maybe the bulls should consider AMD's current rally over a bad ER as a sign of Micron's capitulation.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.