End of a Chip Boom? Memory Chip Price Drop Spooks Investors

Atheer – Oman News Agency

Amid news that the market has begun to lose steam, prices of high-end flash memory chips, which are widely used in smartphones, dropped almost five percent in the fourth quarter. Some analysts now expect the industry’s growth rate to fall by more than half this year, to thirty percent.

According to Reuters, this led shares in Samsung to dip 7.5 percent last week, while its home rival SK Hynix fell 6.2 percent. Analysts say however that there is unlikely to be a sudden crash, adding that 2018 should be a relatively stable year for chipmakers.

The $122 billion memory chip industry has enjoyed an unprecedented boom since mid-2016, expanding nearly seventy percent last year alone, thanks to robust growth of smartphones and cloud services that require more powerful chips for data storage.

Supply has also become more disciplined, following years of consolidation that reduced the number of manufacturers to a handful from around twenty in the mid-1990s.

“Memory chips will likely see a gradual price decline in 2018 if demand remains strong and appetite from servers holds,” said Lee Jae-yun, analyst at Yuanta Securities Korea.

Yet growth of thirty percent is a strong gain in an industry known for volatility and the market remains on course for its longest ever boom, after shrinking six percent in 2016.

Last year’s explosive growth gave chipmakers cash to reinvest and boost output. The supply of NAND flash memory chips in particular will grow 43 percent this year, up from last year’s 34 percent, causing prices to drop by about ten percent.

Nomura expects that growth in output will be largely led by the likes of Western Digital, Toshiba Corp and Micron Technology Inc, as they seek to catch up with top-ranked Samsung, which controls about forty percent of the flash memory chip market.

Smartphone vendors have been including more memory in their phones and charging more for them, allowing them to weather last year’s price surge, say analysts.

Average DRAM memory of new models launched last quarter increased by 38 percent from the second quarter of 2016, while NAND content measured by gigabyte jumped 84 percent.

Such solid demand will keep the industry’s margin healthy this year and chipmakers’ investment in more advanced technology will help them cut production costs and stay profitable even as prices ease, analysts say.

Macquarie estimates Samsung’s chip division’s operating profit margin jumped to 47 percent last year from 26.5 percent in 2016, and will rise further to 55.5 percent this year.

While the NAND flash market may soften somewhat, the DRAM memory chip market, which is some $20 billion bigger than the NAND industry, is seen as being much tighter. Prices are expected to gain nearly nine percent because of a severe supply shortage.

With DRAM manufacturers’ rushing to ramp up production they are likely to nearly quadruple capital spending for 2017 and 2018, combined to $38 billion from 2016’s $10 billion, with a possibility that prices will decline as much as 18 percent next year. That gives some investors confidence in the industry’s long-term future.