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memory chips are looked down upon again

2024-10-05

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earlier, morgan stanley released a report emphasizing "memory chips, cold winter is coming." later, this report was defeated by the performance of samsung, sk hynix and micron. some institutions have also seen too much memory chips in relevant reports.however, recently, many analysts and institutions have expressed their pessimism about the prospects of storage.

for example, semiconductor analyst lu xingzhi pointed out that storage module manufacturers in taiwan generally have inventories of up to 11 months. once the price of traditional dram drops, it will become normal to recognize inventory losses.

objective analysis analyst jim handy also believes that the memory market is artificially driven by ai server demand, with oversupply and a price adjustment is coming.

memory chips, sharp decline

according to relevant reports, the dram and nand industries are once again facing pressure from declining consumer demand, with dram and nand contract prices falling by nearly 20% in just one month.

the dram market has experienced a roller-coaster ride over the past few quarters, with demand hitting all-time lows due to waning consumer interest and poor overall market dynamics. in response to the situation, manufacturers have taken inventory adjustment measures by clearing inventory by cutting prices, and now, after months of rising prices, they are in a bullish stance.

however, korean media theelec reported that the market has cooled down, with dram and nand prices falling by double-digit percentages. according to the report, analysis company dramexchange pointed out that the price of ddr4 8gb 1gx8 module has dropped by 17.07% to us$1.7 in september, and the consumer pc market's interest in this has declined. this is primarily due to consumers transitioning to next-generation standards, which is causing the market to slow down in the shortest possible time. during the same time period, 128gb 16gx8 mlc sales also fell by 11.44%.

another reason for the price drop is that memory manufacturers are still in the inventory adjustment phase,the older ddr4 standard is difficult to sell in the market, while ddr5 modules are currently in high demand. while ddr5 is becoming mainstream in the industry, it still has a long way to go in replacing ddr4's dominance, especially for consumers looking to get low to mid-range computing performance from their systems.

for example, the latest financial report of micron technology, an industry leader that had delivered good results earlier, showed that although the company's profit performance was strong, the inventory turnover days increased slightly and did not meet the previous destocking target.

the increase in micron's inventory reflects that although demand for cloud applications is growing strongly, demand for other end products still cannot keep up with the increase in production capacity of upstream manufacturers, resulting in slower than expected destocking.

inventory management results from other upstream manufacturers have been mixed. samsung electronics' ds division's inventory value at the end of the second quarter was 32.331 trillion won (approximately us$24.25 billion), an increase of 0.93% from the previous quarter, mainly due to a 1.8% increase in work-in-progress inventory.

sk hynix's inventory decreased by 3.53% to 13.355 trillion won, and the inventory days decreased from 165 days to 139 days. western digital's inventory increased to us$3.342 billion in the last quarter, a 4% increase from the previous quarter, and the inventory days increased from 119 days to 126 days.

industry insiders pointed out that upstream manufacturers resisted price cuts, while downstream customers remained cautious about placing new orders. the impasse could result in significant inventory write-down losses for module manufacturers. the extent of the impact will vary based on each company's product mix and inventory management strategies, and the fourth quarter is expected to be a critical period in assessing these risks.

analyst lu xingzhi also said that the current inventory in the storage market is soaring that even kingston, the leader in storage modules, cannot last more than a month. it chooses to cut prices and promote a bunch of unsold mid- and low-end consumer storage. he predicts that there will be more manufacturers in the future. follow up, especially pay attention to the trends of a-data, transcend, and phison.

he further pointed out that storage companies sell a large amount of inventory to downstream module manufacturers, resulting in the average inventory of taiwanese memory module manufacturers in the second quarter of this year as high as 7.8 months, and some companies have inventories as long as 9 to 11 months.

how long will memory growth continue?

jim handy pointed out that currently, the memory business is performing well. dram spot prices have been relatively stable for more than a year, and nand flash spot prices, although down 20% from the spring high, are still 2.5 times the mid-2023 low.

however, the industry is definitely off trend, which means it is unlikely to maintain its current strength for an extended period of time.

so the big question today is: "how long will this upward trend last?"

the current surge is a demand-driven cycle, and there’s no denying that a lot of the demand is coming from large-scale ai purchases in hyperscale data centers. it is difficult to predict the duration of this cycle. while capacity-driven oversupply is easy to predict, demand-driven cycles are often caused by factors that are difficult to predict.

twenty years ago, demand-driven cycles were uncommon. i have said that they affect the semiconductor market every 15 years: the oil embargo of the early 1970s, the recession of 1985, and the dot-com bust of 2000. then, the pace accelerated, with the onset of the global financial crisis in 2008, followed by a slump in demand due to the us-china trade war in 2018, and the post-pandemic resumption of work in 2022. these all lead to unpredictable market cycles.

now, we enter today's ai-driven cycle. how long will it last? at fms in august, i presented a chart showing the history of very large capital expenditures (capex). the numbers are unusually high right now, but it's unclear how long these companies will continue to spend at a high level. they don't have a corresponding surge in revenue and so can't fund accelerated spending forever.

this cycle is assumed to follow the trends of the previous two demand-driven cycles. what will it look like?

the chart below is based on memory revenue and overlays the past two cycles (2017 and 2021) with today's market. these periods have been normalized to the market's underlying trend, so they are expressed as a percentage relative to the degree of deviation from the trend rather than as absolute revenue.

the past two cycles, the red 2017 cycle and the black 2021 cycle, peaked around month 20 and then experienced a crash. the green cycle is the current market, and the dotted line is a prediction of where it might go if it performs like the previous two cycles. today we appear to be in month 18.

this prediction isn't as scientific as we usually predict, but it does provide something worth considering. today’s massive spending on ai cannot continue forever;when it ends, there will undoubtedly be a supply glut, followed by a price correction or even a crash like the ones in 2018 and 2022. this is something to be wary of.

techinsights, a well-known analytical institution, also emphasized in the report that although artificial intelligence is the main driver of these market expectations, the possibility of a sudden slowdown in the development of artificial intelligence must be taken into account. whether due to macroeconomic headwinds, diminishing returns on investment in ai, or technical barriers to scaling ai models, a significant slowdown in ai progress will have a profound negative impact on the memory market. this stagnation could lead to a sharp decline in demand for hbm, dram and high-capacity ssds, disrupting expected growth and investment patterns in these areas. so while memory markets are poised to grow significantly through 2025, they remain highly vulnerable to the broad trajectory of ai advancements.

five major expectations for the memory market

according to techinsights, looking forward to the rest of 2024 and 2025, the memory market prospects are still very optimistic. the nand market is expected to be restricted by 2025 as nand investment continues to be underinvested as memory suppliers' capital expenditures target higher-margin dram/hbm. at the same time, reasonable hbm-focused investments in dram (combined with production losses from shifting product mix to hbm and limited clean room space required for expansion) will slow dram supply growth. at the same time, artificial intelligence will continue to provide a huge boost to nand and dram demand.

furthermore, the edge ai market (including ai-enabled pcs and smartphones) is just getting started. while initial device offerings in 2024 may not be overwhelmingly attractive from a consumer perspective, techinsights predicts that devices designed in 2023 and 2024 will be more attractive and bring strong demand in 2026. the average dram content of these edge ai devices will increase significantly and will carry more nand on average, further driving demand in the memory market.

finally, in addition to the booming edge ai market, demand in the traditional data center and server space is expected to see another tailwind in the coming years.limited investment in traditional server infrastructure in recent years, combined with a surge in demand in 2019 and the aging of systems deployed during the covid-19 pandemic, is set to drive a wave of replacement and upgrade activity. the resurgence in data center investments aimed at replacing obsolete equipment and meeting changing performance requirements will further contribute to the strong growth of the memory market.

nand revenue is expected to reach $70 billion in 2024, and dram revenue will reach $100 billion. looking forward, overall memory market revenue is expected to exceed us$250 billion in 2025, supported by tight supply and strong demand growth driven by emerging technologies such as artificial intelligence.

in techinsights' report, they provide five major expectations for the memory market in the coming year, as well as potential disruptive factors that may upend everything.

1. ai continues to drive the development of high-bandwidth memory (hbm)

the rise of artificial intelligence, especially in data-intensive applications such as machine learning and deep learning, is driving unprecedented demand for high-bandwidth memory (hbm). hbm's shipments are expected to grow 70% year over year as data centers and artificial intelligence processors increasingly rely on this type of memory to process large amounts of data with low latency. the surge in demand for hbm is expected to reshape the dram market, with manufacturers prioritizing the production of hbm over traditional dram variants.

2. artificial intelligence drives demand for high-capacity ssds and qlcs

as artificial intelligence continues to penetrate various industries, the demand for high-capacity solid-state drives (ssds) is rising. this is especially true for ai workloads that require large amounts of data storage and fast retrieval times. as a result, adoption of quad-level cell (qlc) nand technology, which offers higher density at lower cost, is expected to increase. although qlc ssd has slower write speeds compared to other nand types, it will gain traction due to its cost-effectiveness and suitability for ai-driven data storage needs. data center nand bit demand growth is expected to exceed 30% in 2025, compared with approximately 70% growth in 2024.

3. capital expenditure investment shifts heavily to dram and hbm

driven by the surge in artificial intelligence applications, capital expenditures (capex) in the memory market are increasingly directed toward dram, especially hbm. dram capital expenditures are expected to grow nearly 20% year-on-year as manufacturers expand production capacity to meet growing demand. however, this shift has resulted in minimal investment in nand production, creating a potential supply-driven bottleneck in the market. profitability in the nand space continues to improve, which may reignite investment in this space in 2026.

4. edge ai is starting to take off, but it won’t have an impact until 2026

edge ai, which brings artificial intelligence processing capabilities closer to data sources on devices such as smartphones and pcs, is expected to be available in 2025. however, the full impact of this technology will not be felt until 2026. devices with true on-device ai capabilities are expected to launch by the end of 2025, but sales are unlikely to be large enough to impact the memory market immediately. the real shift should occur in 2026, as edge ai will become more ubiquitous, driving demand for memory solutions customized for these new capabilities.

5. data centers’ focus on artificial intelligence delays traditional server refresh cycles

the focus on ai-driven data centers is causing delays in refresh cycles for traditional server infrastructure. many organizations are shifting resources to upgrade their ai capabilities while traditional servers are in need of updates. while this delay may be manageable in the short term, at some point these servers will need to be updated, which could cause a sudden surge in demand for dram and nand. once it finally happens, this delayed update cycle can cause memory requirements to rise significantly.

techinsights emphasizes that despite the positive outlook for the memory market, we expect the market to continue to be volatile in the medium to long term. early ai-driven demand fluctuations, coupled with cycles of over- and under-investment by memory vendors, could create cyclical imbalances between supply and demand. nonetheless, the overall market sentiment remains bullish and significant investments in technology and production capacity will be required to meet the growing demand for dram and nand in various applications.