- The memory down cycle is longer/deeper than many thought
- The recovery will be slower than past cycles- a “U” rather than “V”
- AI & new apps don’t make up for macro weakness
- Negative for overall semis & equip- Could China extend downcycle?
Micron report suggests a longer deeper down cycle than expected
The current memory downcycle started in the spring of 2022, over a year ago with Micron first reporting weakness. We had suggested that the current memory downturn would be longer & deeper than previous downturns given the unique circumstances and was roundly criticized as too pessimistic.
It now looks like the memory downturn will last at least two years (if not longer) and its clearly worse and longer than most prior cycles. It seems fairly clear that there will be no recovery in 2023, as we are already past the peak season for memory sales, and at best maybe sometime in 2024.
Typically memory peaks in the summer prior to the fall, busy selling season of all things electronic. We then go through a slow Q1 due to post partum depression after the holiday sales coupled with Chinese holidays in Q1. Thus it looks like summer 2024 is our next opportunity for better pricing.
The problem is that “analysts” always kick the can down the road in 6 month increments saying that things will get better in H1 or better in H2 etc;. So don’t listen to someone who now says an H1 recovery in 2024 as its just another kick of the can, without hard facts to back it up.
A “Thud” rather than a “Boing”- sounds of the cycle
The last memory downcycle several years ago seemed more like a “one quarter wonder” with things quickly bouncing back to normal after a short spending stop by Samsung.
This leads investors to believe that we were in a “V” shaped bottom when its obviously a “U” or worse yet “L” shaped bottom.
The down turn this time is not just over supply created by over spend but it is also coupled with reduced demand due to macro issues.
We have cut back on supply by holding product off market in inventory, slowing down fabs and cutting capex none of which can fix the demand issue. Perhaps the bigger problem is that product held off market needs to be eventually sold and factories running at less than full capacity beg to be turned back up to full capacity to increase utilization and profitability so any near term uptick in demand will quickly be offset by the existing excess capacity thus slowing a recovery.
We haven’t even started talking about all the potential increase in capacity related to Moore’s law density increases that increases the number of bits per wafer produced due to just ongoing technology improvements.
Bottom line: There is a ton of excess memory capacity with weak demand to sop it all up, it’s gonna take a while.
China can and will likely stifle a memory recovery
The other 800lb gorilla problem that most in the industry haven’t spoken about is China’s entry into the memory market and what that will do to the current down cycle and the resulting market share impacts.
Most in the industry look at the supply/demand balance in memory chips as a static market share model. But its not.
China has been spending tons of money, way more than everyone else, on semiconductor equipment. Not just for foundry and trailing edge but for memory as well. While China is not a big player in memory right now they are spending their way into a much bigger role.
All that equipment shipped into China over the last few years will eventually come on line and further increase the already existing oversupply in memory chips.
Many would argue that China is not competitive in memory due to higher cost less efficient technology but we would argue that China is not a semi- rational player like Samsung or Micron and will price its product at whatever money losing price they need to to gain market share and crush competition. Kind of like what Samsung has done in the memory market but only with state sponsored infinite money behind it.
China is a “wild card” in the memory market that could easily slow or ruin any recovery in the memory market and take share from more rational players or weaker players, such as Micron, who don’t have the financial resources to lose as much money to survive.
In short, China can screw up any potential memory chip recovery and delay it further.
AI and other new apps are not enough to offset weakness & oversupply
High bandwidth memory needed for AI applications is obviously both hot and under supplied. Capacity will shift to high bandwidth memory but not enough to reduce the currently very oversupplied market. The somewhat limited supply of AI processors will also limit high bandwidth memory demand because there aren’t enough processors available and you are not going to buy memory if you can’t get processors.
$7B in capex keeps Micron treading water
Micron talked about $7B in capex for 2024 which likely is just enough to keep their existing fabs at “maintenance” levels.
With the current excess capacity in the memory market coupled with technology based capacity improvements and the threat of China, building new fabs in Boise or New York is a distant dream as it would be throwing gasoline on an already raging bonfire of excess capacity.
We don’t see a significant change in capex on the horizon and most will continue to be maintenance spend.
Both Huawei/SMIC and Micron go “EUV-less” into next gen chips
Further proof of the ability to continue on the Moore’s Law path without EUV has recently been provided by Micron.
It would appear that the latest and greatest memory chip, the LPDDR5 16GB D1b device, which made its debut in the IPhone 15 was made without $150M EUV tools just like the 7NM Huawei/SMIC chip.
Where there’s a will there’s a way…….Micron has always been a bunch of very cheap and very resourceful people who think outside the box and they have done so with this latest generation device without EUV that others are using.
In this case, doing it without EUV at Micron likely means producing it at lower cost
This just underscores our recent article about China’s ability to skirt around the semiconductor sanctions that ban EUV. They will be able to do it in memory as well.
Obviously this is not great news for the stock of Micron. We were even somewhat surprised that there wasn’t a worse reaction and the broader semiconductor market was positive today.
Memory oversupply/demand weakness is coincident with broader semiconductor malaise. The weak capex predictions are certainly a negative for the chip equipment providers.
For Micron specifically we remain concerned about continued losses and what that does to their balance sheet and ability to recover when the time comes. They are certainly burning through a lot of cash and if we do the math, aren’t going to have a lot left at the end of the downcycle assuming we get an end to the downcycle soon (which is not clear)
There is an old joke about Micron that if you totaled up all the profits and losses over the life of the company it would be a negative number. We haven’t revisited that exercise of late but wonder where we are…..and getting worse.
We don’t see any reasonable reason to own the shares of Micron especially at current levels. The stock is well off the bottom yet business is not and we don’t have a definitive recovery in sight.
Risks remain quite high, China is a risk to Micron in several ways and their financial strength, which is important in the chip business, is dwindling fast.
At this point there are less risky semiconductor investments, even at higher valuations, that seem more comfortable.
But then again, Micron stock has never been for the faint of heart…for a reason