Update on DRAM - Stand-Off
This is an update of our last note on DRAM dated 12th October ‘21.
Since then, Hynix (our DRAM posterchild) has recovered some 20% off its low, to now being on the verge of breaking above its downtrend channel. This intrigues ATEC since DRAM spot pricing has actually been declining in recent days. There has also been virtually no developing anecdotes of end-demand picking up.
So why the disconnect?
From the details of the DRAM makers in their recent quarterly reports, it is true that these suppliers have been extremely disciplined at keeping their own production levels controlled. They are now choosing consciously to protect their own margins over volume shipments. This is a significant change in mindset for the entire industry.
A glance at the historical quarterly operating margins for Hynix will illustrate this. Unlike past cycles, where the profitability of the company (and industry) risks declining to low single-digits or even zero, it is now hovering well above the 20s.
Granted, if the street is right, and we see the down-turn end sometime in 1H22, we can expect further downside in the immediate quarter ahead, from the 30%ish level for 3Q21. However, the longer these DRAM makers continue to exhibit such discipline, it will not be long before the said 10–12 weeks’ worth of inventory gets depleted.
Recent updates on Cloud Capex spending (and intentions) by the U.S. tech titans do not show much weakness. If anything, intentions for 2022 are looking rather robust. Witness what Facebook mentioned about their move into the Metaverse, or what Microsoft commented about robust customer cloud spending plans.
As we approach the new year, ATEC thinks this could release a new wave of DRAM demand (amongst other semiconductors and components), which could end this said down-cycle soon enough. Hence, we are also watching Micron. Although its recent price action had clearly lagged Hynix, it too has stopped reacting to the decline in spot DRAM pricing. Nice. Good start.
ATEC does not know when the trigger might come for a breakout move, but we think it is getting closer.
Good luck out there.