Memory Outlook: SK Hynix vs Micron
Memory Outlook: SK Hynix vs Micron
An overview of current developments in the memory industry
Introduction, current developments in the Memory market
The memory industry is in the midst of a cyclical upswing and heading into what looks to be the mother of all memory booms:
This view is shared by Samsung, the leader in the memory market with a 39% market share. Whereas memory has historically been a heavily cyclical industry tied to the PC and smartphone cycles, fresh demand from the datacenter and AI are bringing in a new wave of growth. One of the attractions of this new wave is that it brings in a further diversification of demand, not only from the datacenter but also with more memory being needed on the edge such as in autonomous vehicles, robotics, and AI-enabled smartphones and PCs. Whereas historically, due to its notorious cyclicality, the memory industry swung between booms of cash and deep losses.
As a result, Micron sees high bit demand CAGRs in the memory market coming from a wider variety of sources, with the fastest growth areas being the datacenter, industrial and automotive. Keep in mind that these were estimates from back in ‘22, before the dawn of the LLM capex boom.
AI should obviously lift these growth rates further, for example in the datacenter, where AI servers happen to be much more DRAM and HBM intensive:
Thus the overall semiconductor market is becoming more memory intensive. On Micron’s calculations, memory revenues rose from around 13% of the overall semi market in 2003 to around 27% in 2021. They take a four year rolling average for this calculation as the memory industry tends to be heavily cyclical, so this basically smooths the trend.
Besides demand diversifying, the memory market is also seeing higher levels of customization due to AI. High-bandwidth memory (HBM) — which is integrated with GPUs into a single module — will become tailored to the specific end-application, resulting in long term contract agreements.
Once again, this will ease cyclicality while de-risking upfront capacity investments, as customers have already agreed to take the manufactured wafers. As SK Hynix notes below, this will make it harder for new entrants to compete as customers are tied up in long term contracts while having deep relationships with the HBM manufacturers to co-design modules.
The risk of new entrants is extremely low anyways, DRAM is the bread-and-butter of the memory industry and will see the strongest acceleration due to AI, and this market has evolved since the last decade into a three player oligopoly:
The only real risk of a new entrant could come from China. However, China is now cut off from the most advanced fab equipment, including ASML’s EUV and high-end immersion tools. In any event, there is also a further reluctance from Western companies to source their semiconductors from China, with supply chain security and reliability having become key focus areas over the past five years.
Being a consolidated industry, the DRAM manufacturers are now displaying a lot more discipline, with the various players regularly talking on their respective conference calls how they want to maintain rather than chase market share. This is attractive for investors as a better disciplined industry reduces risks of overcapacity and sets higher prices, bringing in better margins.
As mentioned, DRAM is the bread-and-butter of the memory market, contributing around 70% to revenues for both Micron and SK Hynix. And even more so to profits as margins are higher. The NAND market (SSDs) is much more competitive anyways with also Japanese Kioxia and Western Digital competing with the three DRAM players.
So the DRAM market has a lot going for it. The market should enjoy strong growth drivers in the coming decade, diversifying end demand, reduced cyclicality, accelerating growth due to AI, discipline as only three players are competing, long term supply agreements in both HBM and DRAM, and deeper client relationships due to HBM customization.
For premium subscribers:
We’ll have a detailed look at the dynamics in the HBM market, as well as the HBM manufacturing process flow and discuss which semicap names are plays on this growth area.
We’ll go through the current outlook for the memory market, and developments for both SK Hynix and Micron in particular.
We’ll do a detailed analysis of the financials and valuation for both names to verify whether it makes sense to invest here.
We’ll discuss the recent sharp sell off in tech stocks and go through the outlook for the second half of the year.
Dynamics in the HBM market
The HBM industry is on an aggressive node cadence due to the need for higher bandwidth, higher power efficiency, and increasing memory density.
