The memory chip industry, having weathered a harsh winter, is now poised for a period of cyclical demand improvement. In a report released on Wednesday, Morgan Stanley has once again raised its expectations for memory chip price increases, noting that U.S. memory stocks are now much cheaper than in the previous cycle when viewed from an adjusted earnings per share perspective. The industry is entering a phase of accelerated cyclical growth with a significant increase in demand.
Morgan Stanley's report highlights that downstream restocking, coupled with supply falling far short of demand, will likely lead to a substantial rise in memory chip prices in the first quarter of next year:
"We expect DRAM and NAND prices to rise by 20% in the first quarter of next year, doubling our previous forecast. Previously, we anticipated an 8-13% increase for DRAM and a 5-10% increase for NAND."
The report indicates that downstream clients have begun restocking, with Chinese smartphone OEMs significantly increasing their orders for Q1 2024, and computer ODM/OEMs building up inventory. The restocking by smartphone manufacturers is expected to drive price increases, with inventory levels returning to normal (4-6 weeks for mobile DRAM and 6-7 weeks for NAND).
From a supply-demand perspective, after significant production cuts by storage manufacturers, output is far below demand. With demand improving, the price rise outlook for 2024 becomes more evident.
Furthermore, Morgan Stanley points out that the demand for artificial intelligence will further boost memory chip prices:
"We also need to consider the impact of the $10 billion market growth for HBM chips in 2024 and the sudden emergence of AI demand, which could prolong supply shortages."
Although most AI applications are deployed in the cloud, edge demand (mobile AI) is expected to become increasingly common from 2024, potentially entering the smartphone upgrade cycle.
Overall, Morgan Stanley believes that memory stocks tend to perform well with accelerated year-over-year earnings growth. The sector is now entering the mid/optimistic phase of the cycle, with spot prices for DRAM at -16% year-over-year, still some distance from peak levels. Regardless of valuation, the memory chip cycle has recovered from its Q1 2023 low and is set to improve further in 2024.
Based on the latest industry data, Morgan Stanley has raised its earnings per share forecasts for Samsung and SK Hynix. Hynix is expected to turn profitable in the fourth quarter, driven by growth in HBM market share and significant improvements in commodity prices, reaching record levels by the end of 2024 or early 2025. Samsung, on the other hand, is expected to rapidly increase its profit margins through memory price hikes and may benefit from its S24 edge product integrated with AI technology, set to launch in the first quarter of 2024.
