Memory-chip manufacturer Micron (MU 6.68%) is already dealing with the worst industry downturn in more than a decade. Revenue plunged 53% year over year in the company's latest quarter as prices for DRAM and NAND chips continued to plummet. Micron posted a whopping $2.3 billion loss, its largest ever.
In a case of extremely bad timing, China's Cyberspace Administration has told operators of crucial information infrastructure in China to stop purchasing products from Micron. This comes after an official review of the company, and the move is likely in retaliation for measures taken by the U.S. and Japan to restrict Chinese access to semiconductor technology.
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A problem on multiple fronts
Right now, China is incapable of replacing something like an advanced CPU or GPU with a home-grown alternative or with a product from a company outside the U.S.
But memory chips are a different story. DRAM and NAND chips are largely commodities, and being behind technologically is much less of a problem. Two of Micron's competitors, Samsung and SK Hynix, are based in South Korea and unaffected by the restrictions. Those companies could also fill the gap in demand.
While the ban only affects a subset of Chinese consumers of Micron's memory chips, it's not hard to imagine other Chinese companies following suit. In fiscal 2022, Micron generated $3.3 billion in revenue from mainland China, or just under 11% of its total revenue. All of that is potentially at risk.
In addition, this move by China could exacerbate the oversupply in the memory-chip markets. There are already too many memory chips, and likely too much production. Combined with tumbling demand for PCs and weakness in both the server and smartphone markets, prices are falling off a cliff. Chips originally destined for China could worsen the supply/demand balance outside of that country, prolonging the downturn.
While this move might have been a surprise, Micron has been aware of the risk for some time. In its 2022 annual report, the company warned that " ... the Chinese government may restrict us from participating in the China market or may prevent us from competing effectively with Chinese companies."
A comeback is going to take awhile
Micron said on Monday that it expects the China ban to hurt its revenue by a low-single-digit to high-single-digit percentage. Worst-case scenario: Most of the company's revenue from China disappears.
Micron's fiscal third quarter ends on June 2, so there might not be enough time for the Chinese ban to seriously impact quarterly results. The company has guided for third-quarter revenue of $3.7 billion, a gross margin of negative 23%, and a net loss of $1.79 per share. That negative gross margin will be partly due to significant inventory write-downs.
Looking ahead to the fiscal fourth quarter, though, Micron could see a revenue impact of a few hundred million dollars as sales to China evaporate. Its inventory levels are already elevated -- the company held $8.1 billion of inventory as of March 2. Losing a meaningful chunk of sales is going to make it more difficult to bring inventory down to sustainable levels, and it could force the company to slash prices further to free up cash that's tied up in unsold chips.
The downturn in the memory chip markets will eventually come to an end as supply and demand come into balance, but it could now last longer than it otherwise would have for Micron. A recovery in the second half of this year is still possible, but the ban by China introduces a new headwind that the company will need to overcome.
