Micron (MU 2.92%) is one of the world's largest producers of DRAM and NAND memory chips. It also represents the easiest way for U.S. investors to invest directly in the secular expansion of the memory chip market for two reasons.
First, Micron's largest competitors, Samsung and SK Hynix, are based in South Korea and don't trade on any U.S. exchanges. Second, Micron is a "pure play" on the memory market, not selling other types of chips or products. By comparison, Samsung sells a broad range of other chips and consumer electronics, while Western Digital (WDC 2.77%) sells traditional hard drives and solid-state drives along with its NAND chips.
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Yet Micron's direct exposure to the cyclical memory chip market is also a double-edged sword. It generally grows faster than its more diversified industry peers when memory prices rise, but it also suffers a tougher slowdown when those prices tumble.
Micron is currently amid a cyclical downturn, and its revenue has declined year over year for four consecutive quarters. That slowdown was caused by the post-pandemic deceleration of the PC market, slower demand for new 5G phones, macro headwinds for data center upgrades, and the intermittent COVID lockdowns in China last year.
Micron won't overcome those cyclical challenges anytime soon, but let's dig deeper and focus on three other aspects of its business that smart investors should be familiar with.
1. It's still an underdog in the DRAM and NAND markets
Micron might represent the most straightforward way for investors to profit from the growing demand for DRAM and NAND chips, but it's still an underdog in both markets.
Micron claimed 28.2% of the global DRAM market in the fourth quarter of 2022, according to TrendForce, putting it in second place behind Samsung (43.2%) but ahead of SK Hynix (23.9%). However, Micron actually increased its market share throughout the year -- while its two South Korean competitors lost ground -- as it rolled out its new DDR5 DRAM chips for high-end servers and workstations.
Micron faces tougher competition in the NAND market. It ended the fourth quarter of 2022 with a 10.7% share of that market, according to TrendForce, putting it in fifth place behind Samsung (33.8%), Toshiba (TOSBF) spin-off Kioxia (19.1%), SK Hynix (17.1%), and Western Digital (16.1%). WD was the only one of the five market leaders that expanded its market share sequentially into the fourth quarter. SK Hynix could also evolve into a much tougher competitor after it completes the final phase of its multiyear takeover of Intel's (INTC -9.20%) NAND business in 2025.
But despite all that competitive pressure, Micron believes it can maintain its share of this saturated market by developing denser and more power-efficient 3D NAND chips. It currently squeezes more layers of memory cells into those chips than all the other NAND chipmakers -- which could make it the top choice for high-end computing applications.
2. It needs to overcome its issues in China
Micron generated 11% of its revenues from mainland China in fiscal 2022 (which ended last September), but it's faced a growing number of challenges in that key market over the past few years.
Back in 2018, Chinese regulators accused Micron, Samsung, and SK Hynix of colluding as a cartel to keep memory chip prices elevated. In 2020, the Taiwanese contract chipmaker United Microelectronics (UMC 0.39%) pleaded guilty in a U.S. Department of Justice (DOJ) probe revealing that its employees had stolen trade secrets from Micron over several years and sold them to a state-backed Chinese chipmaker. That revelation -- along with its prior price-fixing accusations against the big three memory chipmakers -- indicated that China was eager to develop its own domestic memory chips.
The U.S. also barred Micron from selling its memory chips to the Chinese tech giant Huawei in 2020 as the trade war escalated. China struck back earlier this year by barring its key infrastructure providers from buying Micron's chips.
To top it all off, the U.S. Commerce Department is mulling new restrictions that could prevent domestic chipmakers like Micron from receiving subsidies if they expand their overseas operations in China, Russia, Iran, or North Korea. In other words, Micron is stuck between a rock place in regards to China -- and it needs to resolve these issues soon.
3. Its insiders aren't too confident yet
Micron's stock has risen about 26% this year as investors rotated back toward tech stocks, but its insiders aren't betting on a turnaround yet. Over the past three months, its insiders still sold six times as many shares as they bought.
That's a grim sign, but it isn't too surprising, considering Micron expects its revenue to decline year over year again in its current quarter. Micron's stock also isn't cheap at 77 times forward earnings and five times this year's sales -- although those valuations could come down quickly once its growth accelerates again.
For now, I wholeheartedly agree with Micron's insiders. It might still be a great long-term play on the memory chip market, but it faces too many near-term headwinds to be a worthy buy right now.
