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Micron: The China Connection

Feb. 01, 2019 1:49 PM ETMicron Technology, Inc. (MU)AAPL, AMD, NVDA, SSNLF, TSM373 Comments
Kwan-Chen Ma profile picture
Kwan-Chen Ma


  • 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

This article was written by

Kwan-Chen Ma profile picture
K C Ma, Ph.D, CFA, is the Eminent Scholar and the Mary Ball Washington/Switzer Brothers Endowed Chair of Finance at University of West Florida. I am the Director of Argo Investments Institute which enables college students to manage real money stock, bond, and option funds. I manage market-neutral institutional hedge funds in KCM Asset Management. I write about stocks, bonds, and derivative strategies, long or short, based on our quantitative processes.

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.

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Comments (373)

linklinklink profile picture
Appaloosa 13F just came out. He's going cash across the board. I can't believe how many "sold all" there are.


MU -55% shares
FB -56% shares
GOOG -27% shares
BABA - Sold All
AAPL - Sold All
He's increasing his energy and ETF holdings slightly, but overall he's definitely gone cash. This is the last 3 months of 2018, so who knows what he's done in January.
Toastypro profile picture
Wow, no more BABA and AAPL. That China tariff must have scared him. He's been packing for sure.
If that PCG statement is true then he took a hit with that bankruptcy (the average price per share for PCG was $37.04 and the current price is ~$15.58)
Tony Pow profile picture
MU has been doing great recently. I make 24% on my latest buy and I bet it should go higher.

I sold all my Apple too early otherwise I should gain at least $10 more per share.
Rooster, no transcript but they posted a podcast of the conference and about 29.13 min in Zinzer says they have, "in excess of $10 B in liquidity including proceeds from debt deal" on the balance sheet.

So first of all, that's liquidity not a net cash position but I think if you back out the converts as well as new addt'l debt ($700 MM) as well as other existing debt the number is closer to $5-$6 B in net cash. Not too bad, but not $10 B. We don't know what they've generated in cash from the end of the last quarter to date but the last balance sheet showed a little over $4 B in debt which was included in my back of the napkin estimation of their net cash position.

He also noted that they had expended about $1.8 B in the last quarter on the stock buyback and would continue to be an active buyer spending approx. 50% of FCF.

So my read of this is that rightly so, retiring the converts (which precipitated the most recent debt offering) was the first priority because this would have caused greater dilution. That accomplished, they can focus on the buyback from the CFO's perspective.
Rooster I may be wrong but I think it was $7 bil. That probably includes proceeds from bond sale as redemption of converts most likely has not taken place as yet.
@Nevin_S Hopefully we get a transcript soon.. I did a double take when he said it, but I'm pretty sure that's what I heard.
Goldman tech conference was good. Price action of the stock during the presentation was good (maybe better than I expected). I'm not sure I heard anything new but obviously the market liked what Sanjay and Dave had to say.

Next up from a stock price perspective is NVDAs earnings Thurs. Not sure what to expect b/c I don't own this stock but I think expectations have been adjusted downward quite a bit. My guess is that if NVDA gives decent guidance MU could benefit as well. I think AMAT also reports Thurs - 2/14 after the close which will give us some insight into the CapEx spending taking place. Then on to MU's earnings Mar 28.
Tony Pow profile picture
NVDA may not fare that well. Two factors: Chinese connection and AMD is eating their game sector for lunch.
Kwan-Chen Ma profile picture
Tony, Nevin,

Please see my post on NVDA Q4 last night:

Tony Pow profile picture
Thanks! This is the stock I missed. If I bought it 10 or so years, I could have done very well.

My high school classmate (in the same grade but not the class) participated in its IPO. We did not talk about it in case of insider info.
StR, agreed.
Anybody tuning into Goldman tech conference for MU presentation? I think Micron is scheduled to present at 11:00 Pacific Time.
I will try if I have time. I am hoping it provides a nice boost and if it does I will sell some covered calls to profit from the short term momentum. However, I am a little nervous they will pull an Apple and try to draw the sting if they anticipate bad news to report in March.
I caught part of it.

Towards the end, David commented that they've been buyers of the stock throughout this quarter and that they intend to be for the rest of this year and onward.

I think he commented that they are sitting on $10B in cash..!?

Still expect a stronger 2H, DRAM market remains healthy, very diversified and strong demand drivers still in place, they expect current inventories to be worked through, demand will gobble up, etc.

Sounded very positive all things considered.
Tony Pow profile picture
Good news: Up 5%.
CLab, I don't think it was a con because they originally planned to produce LCD displays at the facility in Wisconsin. Apple decided recently that they will no longer offer any new iPhone models with an LCD display. Presumably they will all be OLED at least at first but I've read about some new display technologies that may eventually replace OLED.
Foxconn , Con's Wisconsin big time.
Kwan-Chen Ma profile picture
Lee, Link


Did you see me, the baddest one of the all.
Lee Briggs profile picture
@linklinklink - Where did you get these amazing videos of the class of 2018 Graduates from Roland George?
linklinklink profile picture
The show is incredible Lee, 10 episodes. You'll have a favourite after the first episode
Lee Briggs profile picture
@linklinklink - My favorite is the $AMD presentation to the board.
Lee Briggs profile picture
KC's students, they don't monkey around, do they?
linklinklink profile picture

"Orangutan Jungle School"

Random but amazing :)
linklinklink profile picture
"Is your suburb on the verge of a crash? | 60 Minutes Australia"
Feb 5, 2019


Sound familiar to 2006 anyone? ;)

lshiang profile picture
I think everyone in this forum should read the book "One Hundred Year Marathon by Michael Pillsbury". US policy toward China has changed in bipartisan level. Its economy will be in long-term decline.
This indeed is a profound book driving current US policy.
floridahockey profile picture
this is a brilliant move by MU (assuming the story is true, of course):

oak8292 profile picture
B.S. meter is flashing a brilliant red. QLC is challenging and to read 16X more voltage levels from a NAND cell is beyond challenging and into science fiction.

A primer on QLC from the Register.

floridahockey profile picture
@oak8292 @Mustafa Rangwala

thank you both for your feedback on this. I will deposit it in the "too good to be true" file...
linklinklink profile picture
Imagine the error correction necessary to jump from 4 to 8 lol
Electric Phred profile picture
Goldman is out with a piece today lowering earnings:

"We lower our Micron EPS estimates including SBC for FY19/20/21E to
$6.27/$3.77/$5.70 from $7.25/$5.55/$6.85 primarily on lower memory ASPs, and assuming less of a 2HCY19 volume pick up. Excluding SBC we model
$6.45/$3.95/$5.90. "

And here's their lead paragraph:

"Our recent industry discussions suggest that memory fundamentals remain very soft, and prices continue to decline. This is in contrast to the significant rally in the memory and HDD stocks YTD even on weak fundamentals (e.g. WDC shares are +24% YTD vs. the S&P 500 +8% despite 1QCY19 EPS guidance that was about 50% below FactSet consensus). MU shares are +24% YTD vs. the S&P 500 +8%. "

I didn't make it aboard the rocket climb from $30 to 40. I think I will wait to at least some rumored progress on the tarriff spat until I climb back aboard.
bigxbomber11 profile picture
"I think I will wait to at least some rumored progress on the tarriff spat until I climb back aboard."

Im buying, now, but this makes sense in many ways, also. Question in my mind is how much of the softness GS reports is from customers of Micron who are thinking the same thing. Delaying expansion and DRAM purchases until more certainty. What effect will a trade resolution have on jump starting DRAM purchases and bringing investors in from the side lines, at the same time? I dont know but Im excited to find out.
"I didn't make it aboard the rocket climb from $30 to 40. "

Apparently, neither did Goldman...
stever88 profile picture
LOL - Good one!
floridahockey profile picture
//Chinese-backed hackers targeted firms in the U.S. and Norway with an extended cyber espionage campaign over the course of nearly a year, security researchers said Wednesday.

Researchers at the firm Recorded Future said they believe actors from the group APT10 targeted the companies to “gain access to networks and steal valuable intellectual property or gain commercial advantage.”

Among those targeted was an international apparel company, AN AMERICAN LAW FIRM THAT SPECIALIZES IN INTELLECTUAL PROPERTY LAW, and a Norwegian IT and cloud services managed service provider (MSP) called Visma.

The researchers said the attackers were able to access the firms’ networks and then deploy malware that allowed the hackers to obtain proprietary information.

“We believe APT10 is the most significant Chinese state-sponsored cyber threat to global corporations known to date,” the Recorded Future report states.

Chinese actors affiliated with APT10 have been active since 2009, and began attacking MSPs in 2017.

The Justice Department late last year charged a pair of Chinese hackers associated with the state government with allegedly conducting global cyber campaigns to steal intellectual property. That indictment tied the efforts to APT10.

The Trump administration has sought to crack down on alleged Chinese theft of trade secrets, most recently with indictments against Chinese telecommunications company Huawei.

The report also comes as the Department of Homeland Security’s (DHS) cyber agency will start to host webinars with companies to help share information about malicious Chinese cyber actors.

Christopher Krebs, who leads the Cybersecurity and Infrastructure Security Agency at DHS, told The Hill on Tuesday that he hopes the sessions will “help folks understand, identify and reduce vulnerabilities and threats.”

“What we want to do is to get them to come back and work with us in the event that they find something," Krebs said.//

(emphasis mine)

Scott Taylor profile picture
@linklinklink I still feel any pullback in the market and MU will be short lived. I also feel the trade war rhetoric won't really escalate. My disclaimer WTFDIK LOL
linklinklink profile picture
"I also feel the trade war rhetoric won't really escalate."

If Trump bans telecom equipment that would certainly escalate the situation ;)
07 Feb. 2019
Hey Link, where were you the last few weeks? Glad your back posting.
Scott Taylor profile picture
@linklinklink I agree but a move like banning telecom equipment may get China to the table quickly looking for a resolution. It is hard to say.
linklinklink profile picture
Like clockwork, S&P 500 bounced off the 200 MA and RSI 70. Down we go again, right in time for the March 1st fear and growth negativity.

SPX' title='http://stockcharts.com/h-sc/ui?s=$SPX'>stockcharts.com/...
linklinklink profile picture
"President Donald Trump said he won’t meet Chinese President Xi Jinping before a March 1 deadline to avert new U.S. tariffs on Chinese goods, intensifying fears the two won’t strike a deal before the end of 90-day trade truce."
2 Hours Ago


Perfectly timed for when the market rally has topped out. If this isn't market manipulation I don't know what is.
linklinklink profile picture
"Trump says he will not meet Chinese President Xi before March trade deal deadline"
5 Hours Ago

Tony Pow profile picture
MU investors should be very profitable for a while especially with the great fundamentals.

My last purchase of MU is very profitable.

I'm questioning the long term:

1. What are the competitors gain from MU's problem in China? They are S. Korea and Japan companies.

2. What happens when China's memory chip company is ready (by the end of 2019)?
floridahockey profile picture
the Chinese won't be able to take meaningful mkt share for 5 years or longer. this issue has been analyzed at length on other MU threads, and IMO William Tidwell has the best handle of anyone on it (so you might want to search his posts).

the article you cite involves NAND production. the Chinese will likely made greater strides there in the next 2-3 years, but primarily at a commodity level. MU's business is primarily (70%+/-) DRAM, and there are no Chinese DRAM competitors on the horizon to worry about. the U.S. has banned sales of any components or equipment to Fujian Jinhua, and there are recent reports that this has shuttered its DRAM operations.


i_am_seeker_2 profile picture
No Chinese memory chip company will be ready for production if US semiconductor equipment companies aren't allowed to send them equipment or employees, as is the case right now.

Even so, they are unlikely to be ready for real production until sometime in the decade of the 2020s.
Tony Pow profile picture
Not according to the article from my link, but it could be not updated from 9-2018. I do not know who is correct. How hard for Chinese to catch up with DRAM? Please shed some light on the first question on MU's Japanese and S.Korean competitors.
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