The semiconductor stocks rally seems to have lost momentum. After months of gains driven by enthusiasm for artificial intelligence, whose progress depends precisely on microchips, investors are once again facing a well-known risk for the sector: that of an oversupply, particularly of memory chips.
Indeed, in recent months the shares of the main memory chip manufacturers have seen sharp corrections. Samsung Electronics has lost about a third of its value compared to the June peak, despite releasing quarterly forecasts better than expected. Another South Korean company, Sk Hynix, after a successful listing in the United States, has fallen by almost 40 percent on the Seoul stock exchange. And the American Micron has dropped over 30 percent.
A STEP BACK: WHAT ARE MEMORY CHIPS AND HBMs
Memory chips, or memory chip, are electronic devices that allow data to be stored and exchanged with the central processing unit, the component that manages all the main activities of a computer. Since memory chips are essential for systems dedicated to artificial intelligence, the so-called hyperscalers – that is, large companies like Amazon and Alphabet, which provide digital services via the cloud – are purchasing them in large quantities, reducing the available supply for other uses and driving up the price.
Simplifying, the main types of memory chip are two: Nand memories (short for Not And) and Dram (dynamic random-access memory). Nand chips are mainly used for permanent data storage in USB sticks and solid-state devices: they are slow but operate without electrical power. Drams, on the other hand, are fast but temporary, meaning they lose data when the computer is turned off. Essentially, Nand memories are intended for long-term data storage, while Drams serve to make a processor work quickly.
With the development of artificial intelligence, a new type of memory chip has emerged, which is actually a subcategory of Drams: HBMs – short for high-bandwidth memory – which allow enormous amounts of data to be transferred in very short times. Unlike “classic” Drams, HBMs are stacked vertically and placed very close to the processor to increase data transfer speed.
WHAT WILL HAPPEN TO MEMORY CHIPS?
To meet the very strong demand from the artificial intelligence sector, memory chip manufacturers have allocated huge sums for expanding their production capacity.
Kwon Seok-joon, professor at Sungkyunkwan University in Seoul, told the Financial Times that he believes this approach is risky because if investments in artificial intelligence slow down or generate returns below expectations, the demand for memory chips could decrease just as new plants come online. Consequently, the market for these semiconductors could return to an oversupply situation, possibly as early as 2028.
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Michael Burry – the investor who became famous for predicting the 2008 financial crisis, as told in the film The Big Short – is also skeptical and has announced a short position on Micron, considering it a stock highly subject to cyclicality. The Financial Times recalled how the Dram market is subject to expansion and contraction cycles: proof of this is that in the 1990s there were about twenty manufacturing companies, while today only three remain (the aforementioned Samsung, Sk Hynix, and Micron).
WHAT IS DIFFERENT FROM THE PAST
Samsung, Sk Hynix, and Micron have all developed large investment plans, but it is unlikely that their production capacity will increase rapidly and thus that the feared oversupply will occur: a semiconductor factory takes years to build – those announced in recent weeks will hardly be operational before 2030 – and requires, among other things, highly qualified personnel to be selected.
Another difference from the past, which could therefore prevent the repetition of the boom and bust cycle, lies in the greater complexity of the production process of Hbm memories compared to traditional Drams: the former require a higher number of silicon wafers, making a sudden increase in their supply more difficult. Finally, manufacturers of these devices have signed multi-year supply contracts with customers that include guaranteed minimum prices, precisely with the aim of protecting themselves from the fluctuations that have characterized the memory chip market in the past.
THE CHINESE VARIABLE
In all this, however, there is a major unknown, which Professor Kwon calls “the decisive variable”: China. According to Morgan Stanley estimates, the country will represent about 30 percent of the new global Dram production capacity until 2028, second only to South Korea. The most important Chinese memory chip company is ChangXin Memory Technologies, which is preparing for a stock market listing: an operation worth nearly 10 billion dollars that could allow it to finance a vast manufacturing expansion plan and strengthen its competitiveness against Samsung, Sk Hynix, and Micron.
According to Kwon, “Korean companies say they will adjust their investments based on market conditions. But they will have greater difficulty controlling supply if ChangXin expands more aggressively than expected.”
