Micron Technology Inc. (MU, Financial) has established itself as a leading producer of memory chips and storage devices. With a strong focus on research and development, the company has benefited from the growing demand for its products across several industries, including cloud computing, data centers, 5G, artificial intelligence and gaming.
In 2020 and 2021, Micron emerged as a winner with tech companies fighting for chips and memory products to cater to the surging demand for consumer electronics. In the last few quarters, however, the supply-demand environment has dramatically changed, posing new challenges. The company has lost more than 13% of its market value in the last 12 months despite a stellar 22% gain since the beginning of 2023.
New challenges and opportunities are driving financial performance
The pandemic had a significant impact on Micron’s business, with the demand and supply of semiconductors being disrupted globally. Now the company has to face several new challenges while trying to make the most of the opportunities that have emerged.
On the demand side, Micron Technology has seen a surge in demand for data-intensive applications such as cloud computing, gaming, e-commerce, remote work and learning and video conferencing, which require more memory and storage capacity. The company has also seen growth in its segments related to 5G technology, artificial intelligence and electric vehicles, which are expected to be significant drivers of future innovation and demand for semiconductors.
However, on the supply side, Micron Technology has faced several headwinds that have limited its production and profitability. The global semiconductor shortage has impacted the company, just like many other industries, especially the automotive and consumer electronics segments. The company has also faced geopolitical uncertainties and trade restrictions, which have limited its access to markets such as China.
As a result of these factors, Micron's financial performance has been volatile since the start of the pandemic. The company's revenue declined from $30.40 billion in fiscal 2018 to $21.40 billion in 2020, before rebounding to $30.75 billion in 2022. Its net income dropped from $14.1 billion in 2018 to $2.68 billion in 2020, before recovering to $8.68 billion last year.
While management initially projected continued growth in fiscal 2023, the most recent quarter saw a 53% year-over-year decline in revenue to $3.69 billion. CEO Sanjay Mehrotra acknowledged this downturn, saying on the earnings call:
"We now believe that customer inventories have reduced in several end markets, and we see gradually improving supply-demand balance in the months ahead."
The semiconductor industry has experienced significant growth over the last two decades, with annual sales increasing from $139 billion in 2001 to $573.50 billion in 2022. The rise in demand for semiconductors has been reflected in the 290% increase in unit sales, indicating the importance of these chips across various industries. As the demand for semiconductors continues to grow, it is expected that semiconductor companies will need to invest in research, design and manufacturing to cater to the growing demand. A 2020 study by the Semiconductor Industry Association and the Boston Consulting Group suggests global demand for semiconductor manufacturing capacity will increase 56% by 2030.
The company, however, has entered a challenging period where earnings are likely to decline before any noticeable improvements are observed.
Challenges looming on the horizon
In recent months, the global semiconductor industry has been rocked by a series of cybersecurity and geopolitical challenges, raising concerns about the future of this critical sector.
One major development has been China's launch of a cybersecurity probe into Micron, which recognizes the country as one of its major markets. The move appears to be in response to new restrictions on the sale of key technology to Beijing by U.S. allies in Asia and Europe. The Cyberspace Administration of China has announced that it will review products sold by Micron in the country, citing concerns about the security of key information, infrastructure supply chains and the need to prevent cybersecurity risks. China accounts for around 11% of Micron’s total sales currently.
This move comes as Japan, another key U.S. ally, announced its restrictions on exporting advanced chip manufacturing equipment to countries like China, following similar moves made by the U.S. and The Netherlands. These restrictions are limiting Beijing's ambitions to become a tech superpower and have sparked a trade war between the U.S. and China. The U.S. has imposed a series of sanctions on Chinese companies involved in the development and production of advanced chips and chipmaking equipment, claiming that some of them are linked to the Chinese military or pose a threat to national security.
These measures have not only raised concerns about cybersecurity and national security, but have also had a significant impact on the global semiconductor industry. The sanctions could exaggerate the global chip shortage that has affected various industries. Continued disruption of the supply-demand dynamics is the last thing Micron wants as it attempts to gain market share.
The Chinese government has denounced the sanctions as an act of economic coercion and technological bullying and has vowed to take countermeasures to protect its legitimate interests and rights. Chinese policymakers have accused the U.S. of hypocrisy and double standards, as the U.S. itself relies on foreign suppliers for many of its chip needs. The Chinese government has also emphasized its commitment to supporting its domestic semiconductor industry to pursue self-reliance. This strategy could pose long-term challenges for Micron as the company may not be able to utilize its well-established presence in China to generate revenue in the future.
Takeaway
Micron is a major player in the memory chip industry, but faces significant headwinds due to the escalating tech war between the U.S. and China.
The company is well-positioned to thrive in the long run, aided by favorable macroeconomic trends such as the growing popularity of highly advanced technological devices and the increasing penetration of electric vehicles. However, Micron will have to navigate a challenging environment before making the most of these favorable long-term trends. Its share price will likely remain depressed until a new catalyst emerges.
