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Better Buy: Micron Technology vs. Samsung

By David Jagielski - Nov 15, 2019 at 8:45AM

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Both of these companies have been struggling of late, but which stock is the more likely of the two to recover?

Samsung (OTC: SSNLF) and Micron Technologies ( MU -1.52% ) have faced their share of challenges over the past year, and it may take a while before either one of these tech stocks recovers. However, let's take a look at where the companies are today and which one has the brighter future.

Is Samsung headed for some tougher times ahead?

Samsung hasn't been doing terribly well this year. The tech stock recently released its Q3 results back in October which saw Samsung's operating profit decline by 56% from the previous year. The worst part of it all is that this is not new territory for the company, as its profits have been down for four straight periods now.

The problem for investors is that the issues plaguing the company don't appear to be going anywhere for a while. The chip market, for instance, is one area that has been very weak and the company isn't expecting things to turn around there just yet. While Samsung notes that demand is increasing for chips, there are still many uncertainties in that area of its business as prices remain low. And they could stay that way for a while.

Hands typing on a laptop.

Image Source: Getty Images.

But one area where the company sees some progress in 2020, however, is in the 5G market and the launch of premium products like the company's folding phone. While it's an intriguing venture, it could be a risky one, as it's debatable whether there will be sufficient demand for the new phone.

Samsung admits that 2020 could be a very big question mark for it. In its earnings release, the company stated, "Looking ahead to 2020, while challenging to provide a detailed forecast due to ongoing uncertainties involving macroeconomic issues, there are positive signs on the demand outlook from data center customers."

What that suggests is the concerns around the economy and ongoing concerns around tariffs and trade wars could thwart the company's results next year. But despite the struggles, Samsung is still looking to be the chip leader, as it expects that by 2030 it will have invested as much as $120 billion into making logic chips, which are involved in processing. That would complement the company's current leadership position very well as its chip devices are today used in memory and for displays.

Does Huawei exposure make Micron too risky?

Earlier this year, the U.S. Commerce Department blacklisted Chinese tech company Huawei by placing it on its Entity List, which makes it difficult for the company to purchase U.S.-made products.

That's a big problem for Micron, as Huawei is one of the company's larger customers. And while there are rumblings that restrictions selling to Huawei could soon be eased for U.S. companies that have looked for relief, it's a risk that isn't going to go away anytime soon. With the U.S. and China still at odds and in the midst of a trade war, selling to Huawei is always going to be a big question mark moving forward. Huawei has represented about 12% of Micron's revenue in 2019, and so it's fair to say that Micron could be significantly impacted if restrictions relating to Huawei are not eased. 

Another risk facing Micron is tariffs. For its full-year results, the company noted that 89% of its sales were to locations outside of the U.S., with more than half coming from products sold into China in each of the past three years. 

To make matters worse, the soft demand in the semiconductor business has also had a negative impact on Micron's sales. Revenue of $4.9 billion during the quarter was down 42% from the prior year. A big part of that was due to the company's NAND revenue, which fell by 32% to just $1.5 billion for the quarter. DRAM sales of $3.1 billion, good for nearly two-thirds of the company's total revenue, were down even more -- 48% from the prior year. 

Why Samsung wins

While both companies are facing many of the same headwinds, especially due to a chip shortage, Micron puts investors at even more risk given its exposure to Huawei and the Chinese market. With Micron's heavy dependence on that part of the world, it's clear that Samsung is the much safer buy today. While it may have stumbled, there's little doubt that Samsung will continue to dominate not just cellphones but the chip market as well, making the company the better long-term buy today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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