Memory chips are a boom and bust business that is already very capital intensive, and increasingly so. The dilemma for investors is this–the stocks have already gone up a lot and the industry has already planted the seeds of its own future downturn in the immense capacity expansions now underway. On the other hand, these additions are still several years off.
A side issue, which may end up becoming important at some point, is that China appears to have unused capacity. Sanctions have prevented that country from obtaining cutting edge chip-making equipment from ASML and also deter western product makers from using Chinese output of any type. We’ve already seen gamers begin to make the shift–as well as Chinese chip makeers raise prices.
Let’s put that to the side for now.
The big issue that investors are struggling with is that we know that, with or without China, the current boom will end within a few years and we surmise that the usual trainwreck will then ensue as massive new capacity come online, virtually all at once. On the other hand, Micron (MU) is still only trading at 14x earnings, even after having tripled so far this year. And it would be very unusual for the market to discount today capacity additions that are at least a couple of years in the future.
The newest piece of information that has come out is the Samsung Electronics pre-announcement of very strong earnings growth in its latest quarter. More important, though, is the fact the stock went down on the news.
Personally, I sold the MU I owned a while ago and put most of the proceeds into a dram ETF. This is after having trimmed my overall tech exposure significantly a while ago and put that money into things like the NY Times and the Atlanta Braves. Given the trainwreck the administration has made of the US economy, it’s hard to know whether cash, or foreign stocks, wouldn’t be a better move.
But my main point is that the Samsung Electronics price action suggests that the DRAM trade may well be living on borrowed time.