Chipmaker Micron (NASDAQ:MU) delivered better-than-anticipated results for the third quarter of Fiscal 2023 but cautioned investors about the recently imposed ban by China on its products. Micron CEO Sanjay Mehrotra said that the Cyberspace Administration of China’s (CAC) ban is a “significant” headwind that is impacting its outlook and slowing its recovery.
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Last month, the CAC prohibited operators of key infrastructure in China from buying Micron products, citing significant network security risks. The ban came amid growing U.S.-China tensions and is being seen as China’s retaliation to the Biden administration’s restrictions on the sale of advanced chip technology.
Impact of China Ban
Micron slipped into a loss of $1.43 per share in Q3 FY23 (ended June 1, 2023) from earnings per share (EPS) of $2.59 in the prior-year quarter. The bottom line was impacted by about a 57% decline in revenue. However, investors were pleased with the CEO’s commentary about the memory industry passing the “trough” in revenue and the prospects of improvement in margins once the industry supply-demand balance is slowly restored.
During the Q3 earnings call, CFO Mark Murphy explained that while the impact of China’s ban on its products was “very little” in the fiscal third quarter, the company expects a more material impact in the Q4 FY23 and Q1 FY24.
CEO Mehrotra said the impact of the ban remains “uncertain and fluid.” Chinese government officials or certain critical information infrastructure operators have already contacted several Micron customers, including mobile original equipment manufacturers, over concerns about the future use of the company’s products.
Micron derives about 25% of its revenue from companies headquartered in Mainland China and Hong Kong. As of now, the company estimates that about half (around a low double-digit percentage) of its revenue from China-based customers is at risk of being impacted by the ban. While the company anticipates the ban to cause increased quarter-to-quarter revenue variability, it is taking initiatives to mitigate the impact of the situation by working with other global customers who are not impacted by the CAC’s decision.
Meanwhile, Micron is optimistic about the demand induced by the ongoing artificial intelligence (AI) wave. The company’s data center division witnessed solid quarter-over-quarter revenue growth in both cloud and enterprise businesses, with the accelerated adoption of generative AI fueling higher-than-anticipated demand for memory and storage products used in AI servers.
Is Micron a Buy, Sell, or Hold?
Following the results, Goldman Sachs analyst Toshiya Hari said that he believes in the company’s ability to mitigate potential share loss in China and win market share in the HBM3 market in the times ahead. Hari reiterated a Buy rating on the stock with a price target of $80.
With 14 Buys, three Holds, and one Sell, the average Micron stock price target of $75.06 implies nearly 12% upside. Shares were up more than 3% in Thursday’s pre-market trading.
