MU is one of the main global makers of memory semiconductors, the other key producers being the South Korean firms Samsung Electronics and Hynix.

The memory business is in many ways similar to mining, in that both industries are highly capital intensive, their products don’t have many unique characteristics to differentiate one from another, and there are enough makers that customers, particularly of base metals, often have considerable market power. So these businesses–and their stocks–are prone to booms and busts.

We’re now in boom–the midst of an AI-chip generated surge in demand for tech hardware in general and DRAM in particular, with memory prices up by at least 4x over the past 12 months.

The stocks of the big three DRAM makers skyrocketed starting in the second half of last year, as a looming DRAM shortage became apparent, as well as when the Nvidia-Broadcom frenzy that preceded the memory chip craze was beginning to lose steam.

(As it turns out, I bought MU in the portfolio I’m actively managing during 4Q2025 and sold the last of it in June. This was partly due to price, partly because I wanted to reduce my exposure to IT.)

The three manufacturers are already starting to do what commodity product producers always seem to do when they’re flush with cash–expand. Korea has announced it intends to double DRAM capacity through an investment of half a trillion dollars. MU is expanding as well. But it is also asking customers for take-or-pay contracts in order to reserve output from new plant.

Generally, these contracts are agreements requiring a given customer to purchase specified amounts of output at specified prices from the new MU plant. The customer must pay whether it takes output or not, although if it chooses not to take output, it will sometimes be able to get a discount on later purchases. Presumably, MU will use these contracts to get better financing terms from lenders for the new capacity.

Two thoughts:

–the massive increase in capacity planned by the global DRAM industry creates the worry that demand may not keep pace with this new supply–and that any overcapacity that emerges will cause a plunge in DRM prices, and

–the take-or-pay structure conjures up images of public utilities rather than of gold mines, dimming the future possibility of MU having the kind of through-the-roof pricing we’re seeing at present. Arguably, this places a hard cap on future PE multiple expansion–as well as the appeal to more speculative investors.

In any event, all this would argue that the best for all these firms is at least temporarily in the rear-view mirror.

IBM announced today, a week ahead of when results would otherwise have been revealed, that its sales and earnings for the quarter had fallen by about 3% below its guidance/expectations.

The stock has declined by about 25% on this news, as I’m writing this about an hour before the close.

The reason for the shortfall, as I understand it, is that–as I would presume to have been common knowledge–the company’s customers have been dealing with skyrocketing costs of physical components like DRAM. So after buying hardware, they have less cash left over for software. It may also be that they have decided that component prices are only going higher, and as a result have pulled hardware purchases forward, leaving even less money available to pay for IBM’s wares.

Two thoughts–to be clear, I’ve never been a big fan of IBM and can’t recall ever having owned it, other than in index funds:

–a loss of a quarter of a company’s market value because of a 3% shortfall seems like a little much, and

–I wonder why the market needed IBM’s help to connect the dots that more spend on hardware means less for software. Of course, the answer may be in whatever caused the stock’s huge leap ahead during the second half of May.

What I find very interesting is that the market seems to have been so clueless. Where were the securities analysts? That this has happened with an industry titan underscores to me that much of Wall Street has left fundamental securities analysis behind and is heavily depending on rapid reaction, presumably by trading bots, to news releases.

If so, what an opportunity for you and me.

One of my early bosses (three levels up from me as a portfolio manager) was very fond of saying, “Trees never grow to the sky.” It mean, of course, that even the most powerful upward impetus for a given stock has its limits. Where that upper bound may be is not set through a flat-out rule–or at least not by any rule that I know of.

When you find a stock that you don’t own yet, but which your analysis says has incredible growth potential, you typically look for something to sell in order to buy it. The target “something” may be your largest position (that you’ve allowed to run past your normal position size limits), or a stock that has already had a very good run and is closing in on a sky-high valuation, or the inevitable clunker that your eye somehow skips over when running down the list of your holdings and performance.

Sometimes, though, even if the position size and surprisingly good recent performance are telling you to trim, you don’t do so. For me, it’s partly that I don’t like to have a lot of cash in what is intended to be a portfolio of stocks and partly that I haven’t found that next good thing. It could also be that I haven’t seen a sharp signal that the situation that is allowing the company to make extraordinary profits is about to change.

My guess is that we’re seeing this kind of warning signal now in the memory chip business. The basic story, as I understand it, is that adding capacity in memory chips is extremely expensive, takes several years to come on line and is the domain of a small number of specialized semiconductor manufacturers. As larger chunks of this relatively fixed capacity are directed to making AI-related product, a shortage of regular old DRAM has developed. Prices have tripled or quadrupled and new capacity now being planned is a long time away.

…but Apple has just indicated that it is exploring using Chinese-made chips in its cellphones

This may come to nothing, although the fact that it’s Apple and that the company has announced this publicly seems to imply that Chinese output is at least a plausible substitute for US or Korean chip offerings. It’s hard to know how all this will play out, however. In the meantime, I think this possibility will act as a drag on all the DRAM stocks. (I’d been scaling out of MU before the Apple announcement and have since sold the rest of my position), In an adjacent arena, NVDA has been pointing out for some time that denying China access to the most advanced AI chips will ultimately backfire, because it will simply incentivize that country to develop its own substitutes. Still, one can see how the trajectory of NVDA shares has flattened since this development. My guess is that the same combination of strong recent performance and new questions about the underlying story will act as a brake on MU.

For what it’s worth, I also think that the amazing strength of IT last year and this is in part the market reaction to government policies that, intentionally or not, mimic those of developing economies. The tried and true formula in that arena is to emphasize export-oriented manufacturing and avoid the domestic economy. My sense is that Wall Street is shifting away from that stance. Whether this is stretched valuations or anticipation of future change isn’t clear. But that’s what current price action is telling me.

Knowingly or not, the economic policy of the administration in Washington has been following the path of post-WWII Japan, which has been adopted by most successful emerging economies since then. The general idea is to encourage export-oriented manufacturing, while suppressing local consumption through tariffs and currency weakness. ICE violence and the fact that this growth recipe is being applied to a technologically advanced economy rather than a developing one are the main novelties that I can see.

In a situation like this, the right equity investment strategy is equally clear: own companies with domestic costs and foreign revenues. Tech companies are a prime example. The worst place to be is the opposite situation–foreign firms selling into the domestic economy, or domestic firms using foreign-sourced inputs. Over the past year, this strategy has been almost cartoonishly successful, producing something like double the index return. The prime sectors to be in have been IT-related.

The past short while has brought a reversal of this trend, however. I see several possible causes:

–the valuation difference between leaders and laggards has become so great that the latter have become more attractive to investors than the former. So what we are seeing is a normal rebalancing

–professionals have already exceeded their yearly performance goals by so much that they’ve decided to safeguard their outperformance by shifting to a more index-like positioning. They won’t gain outperformance by doing so, but, more importantly, they won’t lose what they’ve already achieved

–the market is beginning to act on the belief that current administration policies won’t have a long shelf life

–the rotation through AI beneficiaries–from software creators to specialized chip makers, to installation builders and to component and power suppliers–has run its course. So investors are unclear where to go from here.

I don’t have a really strong conviction about which of these, if any, is the most important. My overall sense is that in the US these days the stock market is more focused on rapid reaction to news than about anticipation. So it itself is not the key leading indicator it once was. if I had to guess, I’d go with the first of these, rebalancing, as the main driver. As far as my own portfolio goes, I’m trying to find non-tech names that are able to keep their heads above water in the current anti-growth domestic environment.

I’ve just (belatedly) updated my Keeping Score page for June. The biggest issue I see is how to deal with the IT trade from now through December.