Winter is coming? Morgan Stanley: Concerns about the memory market risks are exaggerated

Morgan Stanley says the memory industry is entering a downturn, but Nomura Securities disagrees.

On Thursday, September 19th, Nomura Securities analysts CW Chung and Heesoo Min released a report stating: Although commodity prices in the memory market have significantly declined, the upward cycle may still continue. Current investor concerns about HBN oversupply have been exaggerated, and Nomura Securities expects capital expenditures of major US tech companies to grow by nearly 50% this year. It remains difficult to determine whether the overall AI supply chain is oversupplied.

As shown in the chart below, although the industry's year-on-year growth rate has peaked due to base effects, there are two different possibilities after reaching the peak - the year-on-year growth rate may narrow to around 50%, or it may sharply decline by about 50%.

Nomura Securities believes that the overall revenue of the memory industry may still rise due to the strong growth of HBM and high-end DRAM (such as DDR5, LPDDR5, eSSD). Therefore, the recent excessive decline in memory company stock prices may provide investors with a good buying opportunity.

Recently, the semiconductor market has been under sustained pressure, with memory chips being affected by oversupply and price declines, entering a downturn. On September 13th, Morgan Stanley's Seoul branch sold about 1.01 million shares of SK Hynix, and two days later, Morgan Stanley downgraded SK Hynix from overweight to underweight, slashing the target price from KRW 260,000 to KRW 120,000, warning of an impending "winter" in the memory industry.

Concerns about HBM oversupply are exaggerated

Nomura Securities estimates that by 2024, HBM production and demand will be around 1.4 billion GB, and by 2025, with the introduction of CoWoS supply, it may further increase to 2.8-3 billion GB. CoWoS is an advanced semiconductor packaging technology that allows multiple chips to be integrated on a single silicon wafer, providing higher bandwidth and lower power consumption

The supply of HBM is mainly calculated based on the market share of three major companies, with a projected total of 112% in 2025 (50% by SK Hynix + 50% by Samsung + 12% by Micron Tech).

Nomura Securities stated that the total calculated last year was about 105%, leading to market concerns about oversupply, but in reality, oversupply did not occur. This is because the demand for HBM exceeded expectations due to the continuous increase in CoWoS capacity; and some manufacturers' HBM production was disrupted, leading to a decrease in output.

Therefore, Nomura Securities believes that it is still too early to talk about oversupply of HBM in 2025, and even if there is some oversupply, it can be adjusted or absorbed through inventory.

It remains difficult to determine whether the overall AI supply chain will be oversupplied in 2025

At the beginning of this year, the market expected that the capital expenditure of large US tech companies would increase by about 20% year-on-year in 2024. As of September 11, 2024, the market's consensus on the capital expenditure growth of these large tech companies in 2025 was only about 10%. Assuming this consensus prediction is correct, the AI supply chain will be severely oversupplied in 2025.

Nomura Securities does not agree with this consensus - Nomura Securities expects that the capital expenditure of large US tech companies in 2024 will increase by nearly 50%, with AI server investment growing by 160%. If the supply of AI servers increases, investment in 2024 will continue to grow.

As for 2025, Nomura Securities believes that these large tech companies striving for market share in the AI era are unlikely to only slightly increase capital expenditure. While large tech companies are unlikely to expand capital expenditure indefinitely in the future, the possibility of only 10% growth in 2025 is very small. Therefore, it remains difficult to determine whether the overall AI supply chain will be oversupplied.