Why Semiconductor Investors Seem Cautious toward Memory Stocks like MU and WDC
Although the overall semiconductor market’s growth is slowing, segments such as memory and analog could grow significantly faster than the market. Semiconductor memory is a key component in any electronic device and is used to store data. Traditionally, it was used in computers, but the increasing number of portable electronic devices has increased the demand for low power, high capacity memory.
Meanwhile, the rising capability of devices to perform applications like video streaming, analytics, and virtual reality is increasing memory content per device.
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The semiconductor memory market is divided into volatile memory like DRAM (dynamic random access memory) and NVM (non-volatile memory) like NAND (negative AND) flash.
Risks in the memory market
Semiconductor memory is a commoditized product, which means there is little difference in the memory chips of different suppliers. This makes it easier for customers to switch suppliers, and so memory prices are largely governed by the market forces of demand and supply, making memory stocks highly cyclical.
Companies are now constantly investing in research and development to come up with new cost-effective technologies. Samsung (SSNLF) is the leader in the memory market based on costs.
The DRAM market has now consolidated from 30 to just three players: Samsung, SK Hynix, and Micron (MU). In the NAND market, there are three more players: Toshiba (TOSBF), Western Digital (WDC), and Intel (INTC).
In 2014, when there was a DRAM undersupply, Micron and WDC’s share prices peaked to all-time highs. SK Hynix and Samsung increased their DRAM capacity significantly, which led to an oversupply in 2015. This pulled down Micron’s and WDC’s stock price. This downward trend continued for 16 months.
In calendar 2Q16, Samsung and SK Hynix stopped DRAM production to focus on NAND. This brought some stability to DRAM prices. Other NAND suppliers started transitioning to 3D NAND, which required them to stop production of 2D NAND. This created a tight supply situation in the DRAM and NAND markets, pushing up memory stocks in 2017.