Memory chip makers are starting to become attractive, even as pessimism rises

The global memory market is weak and getting weaker, with investment firm J.P. Morgan expecting both bit shipments and average selling prices for dynamic random access memory, or DRAM, and NAND to see “meaningful” declines the rest of this year and next.

But with all of the pessimism surrounding both markets, the DRAM market is expected to only decline 7% this year and 5% in 2023, with mid-teens growth for the NAND market, leaving the total size of the memory market bigger than it’s ever been.

And memory chip makers are starting to look attractive, J.P. Morgan said.

A team of analysts, led by JJ Park, noted that the memory market is likely to see a U-shaped recovery rather than a V-shaped one. As such, the firm sees the biggest beneficiaries as SK Hynix, Micron Technology (NASDAQ:MU) and Samsung (OTCPK:SSNLF) followed by Nanya Technology and Powertech. SK Hynix, Nanya Technology, Samsung (OTCPK:SSNLF) and Powertech don’t trade on U.S. exchanges, but Micron (MU) has been beaten down this year, falling 36% since the start of the year, and more than 30% over the past six months.

However, Micron (MU) has started to see some investor interest, having gained more than 2% over the past month, despite the fact it issued a weak forecast for the fourth-quarter earlier this month, citing macroeconomic factors and supply chain constraints.

“As the memory cycle is getting shorter, we recommend investors buy memory stocks during an [earnings-per-share] downward revision cycle when a pessimistic view is prevailing,” the analysts from J.P. Morgan wrote, adding that the stocks have “over-punished” despite having a better margin profile than they did in the past.

Citi analyst Atif Malik noted that DRAM prices are set to fall below $100 per 32GB in the third-quarter, with memory makers getting “aggressive” to lower inventories in 2022 and 2023.

Malik added that the last time server DRAM prices fell below $100 was in the last 2019 DRAM cycle, which saw higher hyperscale channel inventories, at 14 weeks, compared to the current range of 10 to 12 weeks.

“Memory pricing momentum is an important factor in our spring cyclical indicator framework,” Malik said, adding that DRAM prices bottoming out in the third quarter would support a thesis that chip-equipment prices will also form a bottom sometime in September or October.

And while expectations are that the next couple of quarters likely see slow shipment growth – with J.P. Morgan saying bit shipment growth will be the “lowest level ever” – that dire outlook is not likely to go on for long. As such, inventories are expected to be worked through by the second-quarter and the memory market will “likely bottom out” in the first half of the year, with a recovery coming in the latter part of 2023.

Investment firm Raymond James recently downgraded Micron (MU), citing the fact that “near-term news is likely to work against shares” going into the next fiscal year.