Stocks in Memory Chips Can Also Ride the Ai Gravy Train

The challenging year for memory-chip manufacturers is finally coming to an end, and they're about to receive a significant boost, courtesy of artificial intelligence.

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Memory-chip prices saw a steep decline, plummeting by over 50% from their peak last year. This drop was the result of a massive buildup in inventories, following the reduction in pandemic-induced demand that had been on a blistering pace in 2022. However, it seems that memory-chip prices are now on the cusp of a modest rebound. Nomura, for instance, predicts a 10%-15% increase in prices for both DRAM (used as main memory) and NAND (used in storage) during the fourth quarter. To facilitate this, chip manufacturers have scaled back their production significantly.

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These developments bode well for memory chip giants like South Korea's Samsung Electronics and SK Hynix. In its preliminary earnings report, Samsung announced a 78% drop in operating profit for the third quarter compared to the previous year. However, this profit tripled compared to the previous quarter. While the profit increase was likely driven by smartphones and displays, losses in Samsung's memory businesses are expected to have narrowed. Detailed results will be revealed later this month.

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Investors have taken note of these signs of recovery. Samsung's shares have surged by 22% this year, and SK Hynix's stock has jumped by an impressive 65%.

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While production cutbacks have stabilized memory-chip prices, demand, especially for consumer devices, remains relatively lackluster. This could still exert pressure on margins in the short term, given the underutilization of production capacity.

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However, a new source of demand is rapidly emerging, thanks to the flourishing artificial intelligence sector. AI chip manufacturers like Nvidia are employing a type of DRAM known as high bandwidth memory (HBM), enabling faster data transfers. Research firm TrendForce anticipates a 60% year-on-year growth in global demand for HBM in 2023, with a further 30% increase expected next year.

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Presently, SK Hynix is the exclusive provider of the most advanced HBM generation, which explains the surge in its stock price. However, Samsung is likely to make a significant entry into this market with its cutting-edge HBM chips. If Samsung's stock begins to reflect a performance similar to that of Hynix, this could translate into substantial gains.

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Furthermore, the higher price tag associated with HBM could bolster profit margins. Goldman Sachs foresees HBM accounting for 15% of SK Hynix's DRAM revenue and 10% of Samsung's revenue in the next year.

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While memory-chip giants like Samsung and SK Hynix might not experience the same level of boost from AI as Nvidia, they are undeniably being lifted by the AI trend. Hitching a ride on the memory-chip price cycle's bottom rather than waiting further down the line may prove to be a wise move.

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