The semiconductor space is one of the most exciting and dynamic sectors in the world. However, with the potential exception of oil and other commodity companies, semiconductor companies are perhaps more prone than others to get embroiled in geopolitics. One factor was the pandemic-related shortages of key chips. Currently the scary new capabilities of chip-powered artificial intelligence (AI) applications have national governments on edge.
Last weekend, China's Cyberspace Administration announced the results of its "security review" of Micron's (MU -2.92%) memory products, concluding they posed a potentially serious national security risk. Thus, the Administration instructed China's "critical infrastructure" companies to cease buying Micron's products.
Yet Micron's stock only fell marginally on Monday, then stayed fairly even on Tuesday, even as the rest of the market and tech sector were down significantly.
Here are three reasons the market doesn't think that China's ban is that big of a deal, and Micron investors probably shouldn't either.
1. It shouldn't affect Micron's revenue that much
No doubt, China is a very large and important market for all tech companies, Micron included. However, Micron is perhaps less exposed than some might think. In its last annual report, the company revealed that China only accounted for about 11% of revenue. However, at a recent industry conference, Micron CFO Mark Murphy gave the number as 16%, perhaps reflecting more recent trends. Moreover, Murphy noted that when combined with distributor customers who sell into China, the revenue exposure is about 25%.
Still, a lot of that revenue is not for "critical infrastructure," which is still a very unclear definition. On the heels of the conference, several analysts downplayed the effect of the potential ban. Bernstein analyst Mark Li noted that about 20% of Micron's overall revenue went to the "enterprise and cloud server" sector, which he suspects is what China means by "critical infrastructure."
Using the 11% total China exposure from last year as his baseline, Li concluded that if all servers in China were restricted from using Micron products, that would only account for around 2% of revenue. If using the more generous 25% allocation to China overall, the restrictions would affect about 5% of Micron revenue.
2. China would be hurting itself by restricting Micron's products
A second reason investors are shrugging off the ban is that memory is a commodity, with prices largely determined by global supply and demand. Thus, if China bans Micron's products, it will have to buy more memory from the large Korean players Samsung and SK Hynix. China does make some NAND flash memory itself, but it does not have leading-edge capabilities. Moreover, China's attempts at building its own domestic DRAM company have largely failed, so essentially it has to buy all its DRAM from foreign companies.
The memory companies generally look to balance global supply and demand, so if more bits flow into China from SK Hynix and Samsung, Micron should be able to fill in the gaps elsewhere. It might take some time, but supply chains are likely to reorient themselves in short order.
Another reason why China may not restrict Micron for most applications is that the country might have to pay more for memory than it otherwise would. There are only three major DRAM suppliers in the world, and if China restricts Micron, that would leave only two. The remaining two players would be likely to raise their prices for Chinese customers, since the country will have given itself fewer options.
That doesn't make much sense for China. So it's likely the restrictions for "critical infrastructure" won't be extended to other areas such as PCs, smartphones, or autos; they may not even apply to a majority of the server market in China.
3. The U.S. government will likely step in
A final reason this may not be a big deal is that South Korea, the home country of Samsung and SK Hynix, is a staunch U.S. ally against China -- and the U.S. is likely to ask this key ally for help. The U.S. is an even larger market for these two competitors, and they'll want to retain those sales, so the U.S. and Korea may work together to contain the fallout.
In fact, on Tuesday, Senate Majority Leader Chuck Schumer stated that he and the Biden administration were engaging with allies to "address" China's ban. And the Republican chair of the House Foreign Affairs Committee, Michael McCaul, also issued a statement of support to counteract China. So there's a rare bipartisan agreement on supporting Micron against the Chinese government.
Even if South Korea doesn't work with it on this issue, the U.S. is likely to act unilaterally. Given that the government has stepped in with subsidies to ensure the health of domestic U.S. chip manufacturing, it's also likely to help Micron mitigate any of the damage done by a Chinese ban -- perhaps by ordering U.S. companies to buy more of Micron's memory chips than those of its Korean competitors.
Micron now has leading memory technology, having surpassed its Korean counterparts to become the first to develop 232-layer NAND and 1-beta DRAM last year. So even this worst-case scenario wouldn't put U.S. companies at a disadvantage technologically.
While geopolitical headlines tend to cause great angst, it's really the cycles of demand for DRAM and NAND that will drive Micron's stock over the long term. It appears that the memory industry is near a bottom of this cycle, and investors are rightly more concerned with that than the recent posturing by China.
