It has been a tough year for Micron (MU 2.55%). The memory chipmaker's stock closed at its all-time high last January, but subsequently tumbled more than 30% as investors fretted over the cyclical slowdown of the semiconductor market.

But even after that steep pullback, Micron still doesn't seem like a screaming bargain at 46 times forward earnings and five times this year's sales. These three bright red flags could also prevent value-seeking investors from rushing back.

Sticks of DRAM memory.

Image source: Getty Images.

1. Micron hasn't reached its cyclical trough yet

In the second quarter of fiscal 2023, which ended on March 2, Micron generated 74% of its revenue from DRAM chips and 24% of its revenue from NAND chips. Its sales of both types of chips have tumbled by double digits year over year over the past three quarters, while its adjusted gross margins turned negative in the second quarter.

Metric

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Q2 2023

DRAM Revenue Growth (YOY)

29%

15%

(21%)

(49%)

(52%)

NAND Revenue Growth (YOY)

19%

26%

(14%)

(41%)

(55%)

Total Revenue Growth (YOY)

25%

16%

(20%)

(47%)

(53%)

Adjusted Gross Margin

47.8%

47.4%

40.3%

22.9%

(31.4%)

Data source: Micron. YOY = Year-over-year.

Those declines were mainly caused by the post-pandemic slowdown of the PC market, sluggish sales of smartphones as the 5G upgrade cycle cooled off, and macroeconomic headwinds for enterprise and data center chips. As a result, the chip shortage from 2020 and 2021 turned into a supply glut, market prices plunged, and Micron's margins contracted.

Micron expects its revenue to plunge another 55% to 59% year over year in the third quarter of fiscal 2023 as its adjusted gross margin stays negative. That grim guidance raises a bright red flag that suggests Micron's cyclical slowdown is far from over.

2. Some of its chips could be banned in China

Back in March, the Cyberspace Administration of China (CAC) launched a cybersecurity review of Micron. On May 21, the CAC said Micron failed the review, and that it would bar the country's key infrastructure providers from purchasing its chips.

The CAC claimed Micron's chips had "serious network security risks" that could compromise "China's critical information infrastructure supply chain" and endanger its "national security." The CAC didn't elaborate on those actual risks or explain if China's non-infrastructure companies or foreign companies within China could still buy Micron's chips.

But this ruling -- which marks another escalation of the trade and tech war between the U.S. and China -- could make it tougher for Micron to mount a cyclical recovery. Its revenue from China (excluding Hong Kong and Taiwan) rose 35% in fiscal 2022, making it the chipmaker's fastest-growing region, and accounted for nearly 11% of its top line. It's unclear how much of that revenue came from "key infrastructure" customers, but it could be enough to curb the region's growth.

3. The U.S. could further throttle Micron's chip sales in China

Even if China allows other companies to keep purchasing Micron's chips, the U.S. could still force Micron to withhold its chips from China with a new set of proposed rules for its CHIPS for America Incentives Program, which grants subsidies to U.S. chipmakers that manufacture their chips domestically. Micron fits that profile, because it still produces a large portion of its chips at its U.S. plants in Idaho and Virginia.

But in late March, the U.S. Commerce Department proposed adding a new set of "guardrails" to the program that would bar chipmakers that receive CHIPS subsidies from expanding their operations in China, Russia, Iran, and North Korea. Those rules haven't been approved yet, but they could impact Micron's overseas foundries (including one in China), and make it much more difficult for Micron to overcome its cyclical challenges and stabilize its business.

It's not the right time to buy Micron yet

Micron will likely remain one of the world's top memory chipmakers for the foreseeable future, but its cyclical slowdown could be exacerbated by its unpredictable regulatory challenges in the U.S. and China. So for now, investors should avoid Micron and stick with better-diversified tech stocks that don't face as many near-term headwinds.