Micron: Will the "Overheated" HBM Market Shift from Shortage to Surplus?

After analyzing the storage industry as a whole, this article mainly focuses on the specific calculation of the supply and demand relationship of HBM and the performance increment of related companies.

Through specific quantity analysis, Dolphin Jun has concerns about the current supply and demand situation of HBM. Mainstream institutions currently generally believe that the supply shortage of HBM will continue. However, Dolphin Jun believes that if the capacity planning of various companies is implemented as scheduled, the supply and demand relationship in the HBM market may shift to "supply exceeding demand."

In the calculation of the supply and demand relationship, some market structures use TSMC's CoWos capacity as a measure of demand. Dolphin Jun believes that the main end products of HBM are currently AI servers, and cloud service providers are the ultimate consumers (paying parties) . Starting from the capital expenditures of major companies and the shipment volume of AI servers, it reflects the relatively true demand situation. If the shipment volume of AI servers falls short of expectations, then both CoWos and HBM as upstream suppliers may face overcapacity.

Taking the capital expenditures of cloud service providers and the shipment volume of AI servers as the basis of demand and the expansion plans of storage manufacturers as the basis of supply, Dolphin Jun calculates that under the current expectations, HBM will shift from "supply shortage" at the end of 2023 to "supply exceeding demand" at the end of 2024.

The reasons for the current relative tight supply of HBM, Dolphin Jun believes are ① it takes time for capacity ramp-up and yield improvement; ② Samsung's new products have not yet entered NVIDIA's supply chain. With the improvement of capacity and yield, once Samsung is certified, the tight supply situation of HBM will undergo significant changes.

From the current demand perspective, the overall HBM can bring about a market space of over 10 billion US dollars. Considering the production capacity plans of the three companies, Micron can still only obtain around 1% market share, bringing about an incremental revenue of around 1 billion US dollars to the company, accounting for less than 5% of the revenue.

Of course, $Micron Tech(MU.US) itself represents the dual logic of "resurgence of traditional products + HBM increment," but even considering the core operating profit of over 8 billion US dollars in the company's 2025 fiscal year, the current stock price corresponds to around 18 times PE, which is not undervalued for a company with obvious cyclical attributes. The continued rise in the company's stock price still requires more unexpected performance to drive, such as the mass production of AI PCs and AI phones, a significant increase in internet companies' procurement of AI servers, or additional opportunities brought by the lack of competitors.Below is Dolphin's specific analysis of the HBM industry and companies:

I. Supply and Demand Relationship of HBM

Before valuing Micron and storage companies, the key lies in the view on the supply and demand relationship of HBM. Driven by demand in AI servers and other areas, the demand for HBM will also increase exponentially. The short-term surge in demand may lead to an imbalance in supply and demand, and mainstream storage manufacturers have also raised expectations for capacity expansion. So, will the imbalance in supply and demand of HBM continue to exist?

Regarding the supply and demand relationship of HBM:

① Supply side: It can be combined with the production capacity planning of major storage manufacturers for their respective HBMs;

② Demand side: Some market institutions calculate demand by reverse deducing the CoWos capacity of TSMC, but Dolphin believes that attention should be paid to the "who pays, who buys" end consumers, especially starting from the capital expenditure of AI servers and major internet companies.

1.1 Capital Expenditure of Major Internet Companies & AI Servers

HBM is currently mainly used in AI servers, and major internet companies mainly purchase AI servers for training and inference. Therefore, the capital expenditure of major internet companies will directly affect the shipment volume of AI servers.

Driven by demand such as GPT, major cloud companies have all increased their capital expenditures. The total capital expenditure of the four major cloud companies (Meta, Google, Microsoft, and Amazon) in 2023 is $150 billion. Combined with discussions with management of various companies in the first quarter, the capital expenditures of the four companies are expected to increase this year, with Dolphin expecting a total increase of $64 billion, a 42% year-on-year increase.

Under relatively optimistic circumstances, assuming that all the increased capital expenditures of the four cloud companies are used to purchase AI servers, let's look at the demand situation for AI servers and HBM. In terms of the market share of AI servers, the four cloud companies (Microsoft, Google, Amazon, Meta) together hold nearly 70% of the market. Under relatively optimistic assumptions, Dolphin speculates that the global market demand for AI servers in 2024 will increase by approximately $100 billion.

Considering the market and industry conditions, Dolphin expects that the shipment volume of AI servers in 2024 is expected to increase to 167.3k units, a year-on-year growth of 465k units. Under the expectation of a $100 billion increase in global AI server purchases in 2024, the average price per AI server is estimated to be around $215,000From a comprehensive perspective, Dolphin believes that the shipment volume of AI servers is relatively reasonable, with a year-on-year growth of 38.5%. With the upgrade of AI servers and the increase in average selling price, under the condition of unchanged capital expenditure, it will actually affect the increase in the shipment volume of AI servers. Unless cloud providers further increase their capital expenditure scale.

1.2 Calculation of HBM Supply and Demand Gap

Calculating the supply and demand gap of HBM can help understand and grasp the price and market changes of HBM. Specifically, the demand side starts from AI servers consumed by end users; the supply side is expected based on the production capacity planning of storage manufacturers.

1) HBM Demand Side

Combining market and industry expectations, it is expected that the shipment volume of AI servers will reach 1.67 million units in 2024. In addition, new products such as GB200 have been introduced in the GPU market this year, with a single card capacity of up to 140GB. Therefore, Dolphin has also increased the average capacity of a single card in AI servers.

Overall, with the increase and upgrade of AI server shipments, the market demand for HBM is expected to grow rapidly. Under relatively optimistic circumstances, the demand for HBM in 2024 is expected to increase to 512MGB, with an 80% year-on-year growth.

2) Supply Side

Currently, HBM is still in short supply, so the production capacity planning of storage manufacturers directly affects the supply of HBM. Currently, the HBM market is mainly dominated by Micron, Samsung, and SK Hynix. Based on the production capacity planning of these three manufacturers, it can be estimated that, driven by downstream demand, all companies have significantly expanded the production of HBM. By the end of 2024, the production capacity of HBM is expected to increase to 273K/m, which is close to three times that of the end of last year.

Based on the production capacity planning of storage manufacturers, the overall supply situation of HBM is calculated. From 93K per month at the end of 2023 to 273K per month at the end of 2024, there is a gradual increase. Therefore, the annual production capacity in 2024 is estimated by the weighted average of the production capacity at the end of the two years, which is approximately 2196k wafers.

Taking HBM3/HBM3E (11mm*11mm) as an example, approximately 491 chips can be cut from a single 12-inch wafer. The following assumptions are made: 1) Cutting efficiency is 90%;2) TSV yield rate is 55%; 3) The average capacity per granule has increased to around 2.2G. Dolphin Jun can calculate that the supply side of HBM is expected to increase from 147MGB in 2023 to 1174MGB in 2024, nearly 8 times the same period last year. Such a significant increase is mainly due to large-scale capacity expansion, improved TSV yield rate, and increased capacity per granule.

3) Supply and demand comparison

As the current three major memory manufacturers only disclosed the capacity situation for 2023 and 2024, Dolphin Jun mainly compares the supply and demand situation of HBM from 2023 to 2024.

① Demand side: Combining the capital expenditure of cloud service providers and the shipment volume of AI, the market's demand for HBM is expected to increase from 284MGB in 2023 to 512MGB;

② Supply side: Combining the capacity plans of mainstream storage manufacturers, the supply side of HBM is more likely to rapidly increase from 147MGB in 2023 to over 1000MGB;

③ Supply and demand relationship: In 2023, the supply side can only meet half of the demand, leading to a severe supply shortage. The situation of supply shortage has driven various manufacturers to significantly increase their capacity plans. If the capacity planning is implemented as planned, the supply and demand relationship of HBM in 2024 may undergo a significant reversal, with the supply side exceeding the overall market demand.

1.3 Opinion on the supply and demand relationship of HBM

In the research process, some market research institutions use TSMC's CoWos capacity as the data for the demand side of HBM, mainly considering: ① Both HBM and CoWos are major bottlenecks affecting the shipment volume of AI server GPUs; ② HBM also needs to be handed over to CoWos in the process, eventually becoming part of AI chips .

In the case of severe supply shortage, the capacity of Cowos is of certain reference significance. However, for the supply and demand relationship itself, more attention should be paid to the ultimate consumers (paying parties). If the capital expenditure of major manufacturers does not keep up, and the shipment volume of AI servers does not grow exponentially, the expanded capacity may also turn into excess.

Dolphin Jun believes that under the promotion of AI servers, there is indeed a situation of supply shortage for HBM. However, with the follow-up of capacity expansion, the HBM market may shift from "supply shortage" to "supply surplus". The demand for HBM capacity has nearly doubled, but the supply side has increased by nearly 8 times (if the capacity plans of various manufacturers are implemented as scheduled).This is not because demand suddenly weakened, but because the supply side has increased too rapidly, leading to a supply-demand imbalance.

If HBM continues to maintain a situation of supply exceeding demand, it will require: ① major Internet giants to once again significantly increase their capital expenditure plans; ② delays in the expansion plans and product certifications of storage giants, with equipment purchases and capacity upgrades being postponed. Otherwise, under the current expectations, by the end of 2024, the HBM market may experience a situation where supply exceeds demand.

HBM and Micron Performance Estimation

After analyzing the storage industry, it ultimately comes down to the companies. For Micron, how much scale can HBM really bring. After the continuous rise in stock price, is Micron still undervalued?

2.1 Impact of HBM on Micron

From the disclosed HBM capacity of Micron, the company's capacity at the end of 2023 is 3k/m, and at the end of 2024 is 20k/m. Considering factors such as capacity ramp-up and yield, Dolphin predicts that Micron's annual HBM capacity will increase from 12k to 138k.

Based on the analysis of the supply-demand relationship of HBM in the early stage, when there is a supply shortage, the capacity on the supply side is the main factor. When supply exceeds demand, it is mainly calculated based on the data on the demand side. Therefore, in 2023, Micron's HBM revenue is calculated from the capacity perspective, while from 2024 onwards, it is calculated based on demand and market share.

Although Micron's share in the three manufacturers' HBM capacity planning is only 7.3%, due to Micron's background in the United States and its early entry into NVIDIA's supply chain compared to Samsung. Therefore, Dolphin expects Micron's market share in 2024 to still be around 10%. With Samsung's products passing certification and the disadvantage in capacity scale, Micron's market share may experience a certain decline.

For the price of HBM, currently due to relatively tight supply, overall prices are expected to rise in 2024. However, with Samsung's products passing certification and the release of capacity, there is also a risk of price decline for HBM products.

Through calculations, Dolphin believes that HBM is expected to bring Micron approximately $1 billion in revenue, with the revenue increase mainly occurring in 2024.

2.2 Micron Performance Estimation

Although there is still demand pull from new requirements such as AI PC and AI phone, the actual performance of Micron currently still comes from the traditional cycle recovery and incremental increase in HBM.

Traditional product aspect: With the pull-in of downstream products after hitting bottom and the capacity control of storage manufacturers, the shipment volume and prices of DRAM and NAND have both seen increases, thereby driving the performance recovery of traditional products. Although new demand can drive product upgrades and further improve company performance, significant contributions are not yet evidentWith the recovery of DRAM and NAND products, Dolphin expects the company's quarterly revenue to rise to over $9 billion, and the quarterly profit to return to around $2 billion.

2) Regarding HBM: Based on previous calculations, driven by the demand for AI servers, Dolphin believes that HBM is expected to bring in around $1 billion in annual revenue for the company. Due to HBM's relatively high gross margin, it is expected to contribute an additional $300-400 million in profit to the company.

3) Overall: Taking into account both traditional products and HBM, Dolphin expects Micron's core operating profit to be around $1 billion in the 2024 fiscal year; while the core operating profit for the 2025 fiscal year is expected to increase to over $8 billion. As the 2024 fiscal year (i.e., 24Q3) is coming to an end soon, the market is mainly focused on the company's performance after this fiscal year. The current stock price corresponds to a valuation of around 18 times PE for the 2025 fiscal year.

Dolphin believes that Micron's current stock price has factored in the cyclical recovery and incremental expectations for HBM, and an 18 times PE for a company with obvious cyclical attributes is not undervalued. Further upward movement in the stock price will require more unexpected performance drivers, such as the volume increase of AI PCs and AI phones, significant capital expenditure increases by internet companies, or additional opportunities brought by competitors' shortcomings.

Retrospect of Dolphin Research on HBM and Micron:

Financial Reports

June 27, 2024 Financial Report Review "Micron: Rising Prices Can't Hold Up Thick Expectations"

June 27, 2024 Conference Call "Micron: Gross Margin Will Continue to Rise in the Second Half of the Year (3QFY24 Conference Call)"

March 21, 2024 Financial Report Review "Micron: Storage Prices Surge, Unveiling the HBM3E Battle"

March 21, 2024 Conference Call "Micron: HBM3E in Mass Production, Supplying NVIDIA (2QFY2024 Conference Call Minutes)"

December 21, 2023 Financial Report Review "Micron Technology: Storage Winter is Over, Price Increases Welcome Spring"December 21, 2023 Conference Call "Gross Margin, Continuous Improvement Ahead (Micron 1QFY24 Conference Call Summary)"

September 28, 2023 Financial Report Review "Micron Technology: Virtual Recovery, Real Downturn"

September 28, 2023 Conference Call "No More Inventory Challenges, When Will Prices Rise?"

June 29, 2023 Financial Report Review "Micron Technology: AI Wave Rising, Turning Point Approaching?"

June 29, 2023 Conference Call "End of Inventory Clearance, AI Adding New Momentum (Micron 3QFY23 Conference Call)"

March 29, 2023 Conference Call "Emerging from the Worst Period, Semiconductors May See Dawn (Micron FY23Q2 Conference Call)"

March 29, 2023 Financial Report Review "Micron's 'Big Bleeding', Perhaps Not a Bad Thing"

In-depth

June 18, 2024 "AI Storage: HBM Holding NVIDIA's Lifeline"

April 13, 2023 "Micron: GPT Cools Down, No Hindrance to Storage Bottoming Out Recovery"

March 15, 2023 "Micron: Have Storage Chip Giants Survived the Winter?"

Risk Disclosure and Statement of this Article: Dolphin Research Disclaimer and General Disclosure