Why the memory chip boom is a problem
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Memory chipmakers are raking in record profits with no end in sight. That may be a problem.
Why it matters: Shares of Micron Technology, Sandisk and the like have helped carry the market over the last year, as seemingly inexhaustible demand from the AI boom pushed profitability to unprecedented levels.
Driving the news: Another tumble for memory shares both in Asia and the U.S. on Thursday.
- These shares have suffered setbacks to start July. Micron was down 15.5% in the first two days of the month. Sandisk was down 23.3%.
Reality check: Memory chipmakers are still sitting on huge gains. Sandisk, for example, is up by roughly 3,700% over the last 12 months through Thursday.
- Such returns reflect the giant profits companies have captured, as AI-driven demand hit a semiconductor market with fixed supply.
- You needn't have an economics Ph.D. to know that's a recipe for higher prices.
By the numbers: According to data from Bernstein Research, prices for DRAM memory chips used broadly in PCs and servers were up roughly 660% in the year through June.
- Benchmark prices for broadly used NAND flash memory — which allows devices to retain data when powered off — are also up 660% over the last year.
The intrigue: Those price increases have inflated profits for makers of memory chips and related data storage products. But analysts say the outsized scale of earnings may carry a risk of its own.
What they're saying: "Demand is way, way ahead of supply, and that gap is wider and wider and the customers are getting more and more irate and desperate," said Mark Newman, memory chip analyst with Bernstein Research.
- "At this point, it's starting to become a problem."
- Newman said one of the risks is that memory chip buyers begin to push the government to relax about the usage of cheaper Chinese memory chips that could significantly add to supplies.
- In fact, that seems to be happening already.
Case in point: The Financial Times and Bloomberg have reported that Apple — which publicly cited surging memory as a key driver of recently announced price increases — is in talks with Chinese memory chipmakers about buying cheaper Chinese chips, despite the fact that some of those companies are currently blacklisted by the Pentagon.
- Korean memory chip giants SK Hynix and Samsung, meanwhile, have announced plans to rapidly invest in expanding their chip fab capacity, which should boost supply of chips over time.
The bottom line: It's tough to say whether such headlines have much to do with the drubbing in memory stocks over the last of couple days, as other AI trades also took their lumps.
- But the news flow shows the complex choreography of supply, demand, and prices — which markets coordinate — is beginning to take shape.
