Banned but Unbroken: Micron's China Conundrum Creates Buying Opportunity, Says Analyst

Mizuho analyst Vijay Rakesh reiterates a Buy rating on Micron Technology, Inc MU with a price target of $72.00.

On Sunday, the Cybersecurity Administration of China (CAC) concluded it sees MU as a cybersecurity threat, following its investigation from March 31, banning Chinese operators of crucial infrastructure from purchasing from the company. 

While still early, 1) MU believes the initial top-line impact ranges from a low-single-digit to high-single-digit percentage of total MU revenue but could be a headwind to China by limiting leading edge DDR5 availability, key for advancing its next-gen technology roadmap; and 2) South Korea says it is not limiting its domestic OEMs from fulfilling orders, though there might be challenges.

The analyst preferred to buy the pullback.

MU noted that quarterly trends are good to date, including declining inventory at customers, better DDR5 pricing, and improving bit shipments Q/Q through 2023E.

On Sunday, China's CAC determined that products made by MU pose network security risks impacting China's national security, barring operators of crucial infrastructure from buying from MU, which the analyst believes could range from financial to telco customers. While MU noted it currently has ~25% revenue exposure to China.

China has few options as significant comprehensive equipment and technology restrictions have impaired capacity ramps and technology road maps at YMTC (Yantgze Memory) and CXMT (ChangXin Memory). At the same time, Rakesh believes MU dominates leading edge DRAM (DDR5) and NAND. So, while near-term channel inventories are high, any restriction on MU could challenge domestic China OEMs ramping up newer technologies. 

 The CAC ban on MU could be a short-term tailwind for Samsung Electronics Co, Ltd SSNLF and SK Hynix, though broader channel inventories remain high.

While the CAC ruling on MU creates near-term volatility around the total impact of restrictions, Rakesh believes restrictions could be a double-edged sword and could impact China's plan for expanding its technology and AI footprint. The analyst also sees demand opportunities with ramps of new Server/Data Center platforms in 2H23 with Genoa, Hopper, and Generative AI.

Price Action: MU shares traded higher by 0.82% at $66.77 on the last check Tuesday.