Samsung and SK Hynix indicate that the memory chip decline may have bottomed out

Recent earnings calls from the world’s two largest memory chip makers indicated that weak demand may have finally bottomed out.

Samsung’s operating profits in the third quarter jumped by 262.6% compared to the second quarter. This came after an 85.15% decrease in operating profits for the first quarter compared to the previous quarter and a slight improvement of 4.68% in operating profits for the second quarter compared to the first quarter.

SK Hynix said in its quarterly report that its DRAM business returned to profit in the third quarter, after losses in the first two quarters of this year.

“One of the big drivers of the memory price recovery is lower industry-wide supply and thus lower inventories,” James Lim, senior research analyst at Dalton Investments, told CNBC.

“Inventory at PC and mobile customers seems to have dropped a lot, and very low memory prices tend to encourage restocking or acquiring more memory content per device,” Lim said.

The two South Korean companies are the world’s top two makers of DRAM chips, according to data from market research firm TrendForce, with US-based Micron in third place. These memory chips are found in consumer devices such as laptops and smartphones.

“We have received numerous purchase inquiries amid growing awareness that the industry has hit bottom, following industry-wide production cuts,” Samsung said in its earnings report last week. Chipmakers have been reducing excess inventories by cutting back production.

During the pandemic, companies stockpiled memory chips to meet record demand for electronics, but left excess inventory when that pressure eased. Inflation has prompted consumers to curb spending and reduce purchases of consumer devices, resulting in lower demand and prices for memory chips.

“The earnings calls confirmed that the memory industry has bottomed as expected,” said Kazunori Ito, research director at Morningstar.

“DRAM average selling prices, or ASPs, rose by mid-digits for Samsung and 10% for SK Hynix, respectively, and this was the first time in eight quarters that Samsung saw a price increase,” Ito said in a November 1 report. “.

“We have made slight adjustments to our earnings forecasts for memory suppliers in South Korea,” Ito said. The financial services company added that Samsung shares are “undervalued” while SK Hynix shares “enjoy an 18% to 20% upside to our fair value estimates.”

Other chipmakers also had strong forecasts.

Taiwan Semiconductor Manufacturing Co., the world’s largest chipmaker, beat analysts’ expectations and predicted that the worst may soon be over for the chip industry. TSMC makes the most advanced processors for companies like Apple and Nvidia based on the Arm architecture.

US-based Qualcomm also gave a strong outlook for the current quarter, citing a rebound in chips. Qualcomm makes the processors at the heart of most high-end Android devices and many low-end phones as well.

“Although inventory levels peaked in mid-2023, they are still at high levels, especially for NAND flash memory,” Morningstar’s Ito said.

NAND is another important memory chip that often works with DRAM in computers, servers, and smartphones. It stores data but does not require power like DRAM.

“As a result, memory suppliers are expected to continue to maintain lower capacity utilization and remain cautious about increasing production capacity next year, which should be favorable for memory prices due to limited supply,” Ito said.

TrendForce said it expects memory suppliers to continue to “reduce production of both DRAM and NAND Flash in 2024,” particularly in the “financially challenged NAND Flash segment.” The research firm also expects demand for DRAM and NAND Flash to increase by 13% and 16%, respectively, in 2024.

In the third quarter, strong demand for advanced, high-performance chips in generative artificial intelligence helped offset a slowdown in chips in computers and smartphones, SK Hynix said in its earnings report.

“On servers, demand for AI has been another strong driver,” Dalton Investments’ Lim said.

ChatGPT and other large language models need a lot of advanced memory chips, which enables these generative AI models to remember details from previous conversations and user preferences in order to generate human-like responses.

“The DRAM business… is expected to continue to improve alongside the generative AI boom. The NAND flash business, which is still experiencing losses, is also showing signs of improvement,” SK Hynix said in a statement.

Regarding memory demand forecasts, Samsung said it expects demand to rise in the fourth quarter with year-end promotions, new product launches by its key customers, as well as strong demand for generative artificial intelligence.