Morgan Stanley: A new round of memory "super cycle", unprecedented supply-demand imbalance expected in 2025

Driven by the demand for artificial intelligence and coupled with insufficient capital expenditures in the past two years, the memory market is experiencing an unprecedented "super cycle".

Morgan Stanley pointed out in its report on Thursday that there will be an "unprecedented" supply-demand imbalance in storage, leading to soaring prices for memory:

The rapid development of artificial intelligence will lead to a supply-demand imbalance for DRAM and HBM, with an expected shortage rate of -11% for HBM and -23% for the entire DRAM market by 2025. In particular, the demand for HBM will significantly increase, potentially accounting for 30% of the total DRAM supply.

Due to the shortage of DRAM supply, coupled with insufficient capital expenditures in the past two years and no new wafer fabs or large-scale wafers available, this will drive the memory market into a super cycle.

Memory prices will also rise significantly, with prices of commodity storage products expected to increase by double digits per quarter in 2024, and even higher prices for HBM in 2025. Server DRAM and ultra-high-density QLC solid-state drives will lead the price increases.

Furthermore, companies like SK Hynix and Samsung are expected to further increase their market share in the memory market:

The earnings per share forecast for the memory industry in 2024-25 has been raised by 24-82% compared to the latest consensus, with a 51-54% increase;

SK Hynix is expected to take the lead, with market consensus underestimating its market share growth potential. It is expected to dominate the HBM market in 2025, with significantly improved profit margins. The target price is raised by 11% to 300,000 Korean won, representing about 30% upside potential. Samsung Electronics' target price is raised to 105,000 Korean won, with a 36% upside potential.

This Memory Cycle is Different

Morgan Stanley pointed out that historically, the memory market has shown clear cyclical patterns, with a similar overall trajectory. Typically, the capital investment cycle is longer, capacity expansion takes 2-3 quarters, and new factory construction takes 2-3 years.

The memory industry usually experiences a brief supply-demand balance every two years, driven by the long capital investment cycle of the semiconductor manufacturing industry. Capacity expansion during the expansion cycle typically takes 2-3 quarters, while the construction and commissioning of new wafer fabs take 2-3 years.

The reasons for the upcycle are diverse, including the internet, cloud computing, COVID-19, and artificial intelligence, which have led companies to view the cycle as a new phenomenon. However, new capacity often comes online when the industry needs it the least.

However, this cycle is different, as noted by Morgan Stanley:

Compared to the past, capital expenditures in the industry during this cycle are far below the level needed to maintain capacity, with capacity declining since the third quarter of 2022.

The lack of investment in this area is occurring as the memory supply chain rapidly transitions to HBM. The wafer capacity required per bit for HBM is twice that of ordinary DRAM, and its production yield is also lower.

Morgan Stanley predicts that by 2025, the market share of HBM will increase, and the overall market supply shortage will become more pronounced:

It is expected that by 2025, the total addressable market (TAM) of HBM is expected to grow significantly, from $37 billion in 2025 to $70 billion in 2027. The market share will account for over 30% of the entire DRAM market, and the blended prices will rise by over 10%.

Starting from 2025, the AI upgrade cycle for smartphones and personal computers may require additional memory capacity, and the market is expected to face a severe supply shortage by then. The supply shortage rate for HBM is projected to be -11%, while the supply shortage rate for the entire DRAM market is -23%.

In terms of prices, SK Hynix and Samsung Electronics are actively expanding their production capacity for HBM and DRAM. It is expected that the contract prices for DRAM in the second quarter of 2024 will increase by 13-18% compared to the previous quarter, and may increase by 10-15% in the third quarter. Morgan Stanley stated:

Given the changes in earnings forecasts and price target adjustments, we have raised the pricing outlook for DRAM and NAND in the third quarter to 13% and 20%, respectively, compared to the previous forecasts of 8% for DRAM and 10% for NAND. Customer behavior has changed, with supply assurance increasingly prioritized over pricing. Orders from Chinese smartphone OEMs are expected to continue to rise into the third quarter, while PC ODM/OEMs will continue to ensure memory supply, and some large PC OEMs will maintain close to 20 weeks of inventory. Industry output remains below demand, production cuts continue, and the improving demand environment brings greater certainty to price prospects in the second half of 2024.

Leading companies in the industry will further increase market share

The AI-driven memory "super cycle" will bring share growth to SK Hynix and Samsung Electronics. Morgan Stanley has raised the target price for SK Hynix by 11% to 300,000 Korean won, with about 30% upside potential. It expects SK Hynix's earnings per share for 2024 and 2025 to exceed market expectations by 59%, and the performance guidance for the third quarter of 2024 will be higher.

Morgan Stanley has raised the target price for Samsung Electronics to 105,000 Korean won, with a 36% upside potential, and pointed out that Samsung Electronics' qualification from NVIDIA will be crucial in 2025. For Samsung, the best outcome is to obtain HBM3E qualification next year to avoid any supply interruptions in GPU demand. The worst-case scenario is that Samsung may need to redirect over 5 billion Gb of HBM wafer capacity to the commodity DRAM market If Samsung's HBM wafer capacity shifts to DRAM, it could have a significant impact on the supply of the DRAM market, increasing supply growth.