MICHAEL Burry of The Big Short fame doesn’t buy the narrative that memory chipmakers have entered a supercycle. He has a point.
In a Substack post, the value-orientated investor disclosed he had shorted shares of Micron Technology Inc, saying that it “defines cyclical like no other”.
He went on to write that “when times are good, the stock gets pumped more than it should. When times are bad it gets dumped more than it should”.
Indeed, judging by share prices alone, the world’s top three memory chipmakers – Samsung Electronics Co, SK Hynix Inc and Micron – are enforcing the perception of an industry prone to volatile boom-and-bust cycles.
When profits skyrocket and the outlook is rosy, these stocks, based on forward earnings, could look deceptively cheap, prompting some to chase rallies in moves that resemble momentum trading.
But if sentiment turns sour, investors question the reliability of analysts’ forecasts and start offloading shares.
Alternative metrics
They resort to alternative valuation metrics, such as price-to-book, which are often applied on distressed firms.
This is exactly what we’ve witnessed after Micron delivered blowout earnings in late June.
Euphoria gave away to a massive exodus, with SK Hynix’s shares – the most volatile of the three – down as much as 25% from their recent peak last month.
Investors were worried about diminished demand from Meta Platforms Inc and Apple Inc.
All of this is happening despite Micron’s laudable attempt to provide earnings visibility.
Management talked at length about the long-term agreements signed with customers.
These contracts typically last five years, involve prepayments, and can account for at least half of revenue when completed.
But these efforts haven’t come to fruition: Micron dipped from 11 times forward earnings in late June to seven times as of last week’s close.
Complex dynamics
But the rudimental problem lies beyond valuation metrics, or leverage embedded in the trading of these stocks.
We are dealing with an industry where supply-demand dynamics are so complex that even the most seasoned analysts can be caught off-guard.
For Burry, big spending out of South Korea signalled “the beginning of the end”.
Making a “great leap forward”, President Lee Jae Myung last week unveiled mega projects of at least 1.35 trillion won (US$880bil), including new chipmaking plants in the southwest from Samsung and SK Hynix.
While this initiative makes sense for Seoul – these investments will be spread out across the country and could account for 2.6% of gross domestic product, according to Barclays Plc – the scale and accelerated timeline will only push the industry’s capacity expansion to a record high.
The shortage in dynamic random-access memory, or DRAM, used in artificial intelligence (AI) data centres, smartphones and personal computers, can evaporate as early as next year.
And how about China, notorious for its price wars?
Local DRAM giant ChangXin Memory Technologies Inc, or CXMT, is preparing for a public listing with plans to raise at least 29.5 billion yuan (US$4.3bil), likely the country’s biggest initial public offering (IPO) since 2022.
Once the IPO takes place, the chipmaker will have the dry powder to expand capacity of its wafer fabrication lines.
As it currently stands, the country accounts for 30% of net DRAM wafer additions till 2028, the second largest after South Korea, according to Morgan Stanley.
The Pentagon-blacklisted CXMT is certainly in expansion mode.
A year-long investment spree has finally paid off, with profits rising to more than 20 billion yuan in the first quarter.
And if Apple ends up being a customer – the tech giant has been lobbying the Trump administration to limit possible political fallouts – the Chinese manufacturer will only accelerate its expansion plans.
Currently, Samsung, SK Hynix, and Micron control roughly 90% of the global DRAM market and manufacture all the high-bandwidth memory chips that pair with Nvidia Corp’s graphics processing units. But this oligopoly is fragile.
Supply-demand dynamics can easily be disturbed by political ambitions in Beijing and Seoul, as memory chips are increasingly viewed as a strategic asset as well as the source of wealth creation in the AI era.
Semiconductor analysts have been talking about an industry supercycle, driven by record profits and long-term customer contracts.
But what kind of supercycle are we in when stock valuations are this volatile and politics can abruptly alter patterns of supply and demand?
Since the 2008 Global Financial Crisis, Burry has made various apocalyptic predictions that have failed to pan out.
But he might just be right on this one. — Bloomberg
Shuli Ren is a columnist for Bloomberg. The views expressed here are the writer’s own.
