Micron's China Woes May Not Be the Disaster Investors Thought

(Bloomberg) -- A Chinese court's preliminary injunction stopping Micron Technology Inc. from selling 26 products may not pose as big of an obstacle as investors think, analysts say, noting that the disruption could drive up industry prices. Stifel called the injunction a possible “paper tiger.”

Micron shares rose 4 percent in pre-market trading after the company reiterated quarterly sales guidance Thursday and said it only expects the injunction to hurt revenue by about 1 percent. RBC wrote earlier that the chipmaker would only face limited downside.

Here's a roundup of the analyst commentary post the breakup announcement yesterday.

Morgan Stanley, Joseph Moore

(Equalweight, price target $65)
The short-term impact should be largely inconsequential, as the injunction appears to affect MU's "Crucial" branded business, not its OEM segment

“Crucial” is MU's consumer brand for selling its memory solutions at retail, so this seems to have little impact on MU's business of selling memory to electronics customers

MU likely has low-single-digit exposure to “Crucial,” and the 26 products are probably a small minority of that; any lost sales would be compensated for by reallocating that memory to other customers or geographies

Stifel, Kevin Cassidy

(Buy, price target $108)

This could turn out to be a buying opportunity, as the injunction may be a “paper tiger” targeting less important MU products

China's aim may not be to bar shipments of MU's DRAM, but instead part of a strategy to push the firm toward partnering with China semiconductor foundries, which could speed up the country's internal semiconductor industry development

Mizuho, Vijay Rakesh

(Buy, price target $72)
Investors should buy MU on the pullback, as this news may simply be “another minor blip on the radar” given MU's market position and IP strength

A supply-chain disruption could be good for NAND/DRAM prices; if the scope of the injunction is narrow, it would have little impact, and if the block on sales is bigger, it could cause DRAM prices to spike given limited availability

The lawsuit only asks for compensatory damages for impacted products, IP and royalty of about $41.7m, which seems small relative to investor concerns

Goldman Sachs, Mark Delaney

(Buy, price target $68)
This could be a “material negative” for MU; about 50% of its sales were from China in FY17 based on customer ship-to location, and around 20%-30% of its products are used in China on an end-consumption basis

That said, the impact is tough to determine, as it's unclear what portion of revenue is covered by the products in the lawsuit, and MU could get a stay or appeal the decision; MU could potentially shift more shipments to third parties to mitigate the impact

For the industry overall, it's possible that any injunction may make it more costly to make certain products like PCs in China, and may help competitors gain share; supply/demand outside China could also become oversupplied

To contact the reporter on this story: Lily Katz in New York at lkatz31@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Steven Fromm, Brad Olesen

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