Zhitong Financial APP learned that after Morgan Stanley released a bearish research report on the memory chip industry named "Winter is coming (Winter Is Coming)," American chip stocks fell sharply. This article will refute based on the point of view in the report. Although Morgan Stanley pointed out the decline in PC sales, it did not realize that the DRAM (memory chip for personal computers) capacity of each computer is increasing year by year, and the market demand for PC DRAM accounts for only 15% of the total demand for DRAM. In addition, there is a difference between the spot price and the contract price of DRAM.

Background

On Thursday, Morgan Stanley analyst Joseph Moore wrote in a research report that the chip industry is entering a later stage of the cycle, when supply exceeds demand. Storage device manufacturers will face a difficult pricing environment next year, and Micron Technology Inc will be downgraded from "overweight" to "neutral" and the target price from $105 to $75.

Micron Technology Inc shares fell 19.8 per cent on Friday, the biggest one-day drop since March 16, 2020. Micron Technology Inc's share price over the past year is shown in figure 1, which illustrates the decline in the past few days and more than 25 per cent since its peak on April 12, 2021.

图1

PC DRAM accounts for a small proportion of the company's total DRAM demand.

Morgan Stanley stressed that the decline in PC DRAM prices is a harbinger of a decline in the DRAM market as a whole. But according to a report on the market analysis of memory chips (figure 2), the demand for PC DRAM accounts for only 15% of the total demand, so this is not enough to stop the cycle of memory chips.

But that's not the point. Morgan Stanley ignores the fact that although the growth of the PC DRAM market is slowing, the DRAM capacity of each computer is increasing every year.

图2

The year-on-year increase in DRAM capacity per computer

图3

Figure 3 shows PC unit shipments from 2015 to 2023. Some analysts expect PC demand to decline in 2022 and 2023, but the decline is due to the normalization of PC demand.

The reason is that the PC market has been declining until 2020, when the 2020 blockade led to a surge in demand for PC until 2021. Therefore, it is expected that the PC market will return to normal demand at an annual rate of several percentage points in 2022 and 2023. In addition, the DRAM capacity of each computer is expected to increase 2.5 times from 5.5 GB in 2015 to 14 GB in 2023.

图4

As a result, although sales of the PC will decrease, the capacity of the DRAM will increase over the next two years.

The spot price of DRAM is different from the contract price.

The whole reason for the TrendForce and Morgan Stanley report is that the fall in spot prices in 2021 led to the final end of the current storage cycle. Figure 5 shows the data comparison between the spot price and the contract price of DRAM.

图5

It is unreasonable and illogical for Morgan Stanley to choose the drop in spot prices as the catalyst for the end of the memory chip cycle rather than the rise in contract prices as the catalyst for the strong growth of memory chips.

Importantly, there is no correlation between PC sales (figure 3) and DRAM chip prices (figure 5). In figure 3, PC sales are at their lowest levels (2017 and 2018), while DRAM chip prices are at their highest. Therefore, the relationship between PC sales and the price of DRAM chips is the opposite, not a direct relationship.

It should also be noted that figure 5 shows the spot and contract prices from October 2016 to the end of 2000. There is a polarization between spot prices and contract prices, with spot prices rising and then plummeting, while contract prices continue to grow strongly and remain unabated.

This disagreement is clearly the result of a "semiconductor shortage", that is, higher prices in the spot market are due to industries, not just the automotive industry, responding to perceived shortages of memory chips, such as hoarding chips. Micron Technology Inc believes that this is the reason for the collapse of DRAM in 2000.

According to the data in figure 5, the contract price continues to rise, unabated. However, TrendForce's statement on the downward pressure on price increases in its press release is contrary to the data in figure 5.

As far as the contract market is concerned, PC manufacturers currently have relatively high DRAM inventories because they have large reserves of PC DRAM in advance because they expect a shortage in the future. In fact, it is not only the high DRAM inventory of PC manufacturers that may bring downward pressure on PC DRAM prices, but also as Europe and the United States gradually lift the epidemic blockade, it may also reduce the overall demand for PC, thereby lowering the overall demand for PC DRAM.

The spot price is based on the price that buyers are willing to pay for items with fear and uncertainty.

Therefore, the spot price is not directly related to the actual (contract) price and is often temporary.

To prove the wrong argument in Morgan Stanley that the DRAM cycle will end based on spot prices, the following figure provides data support (figure 6):

图6

The data in figure 6 shows the DRAM average selling price (ASP) directly reported by Meguiar, Samsung Electronics and SK Hynix.

Comparing figures 5 and 6, it is clear that the data directly from the DRAM vendor matches the contract price, not the spot price. Readers must also keep in mind that spot prices account for only 10 per cent of the DRAM price paid by customers. The contract price accounts for 90% of the actual price.

图7

Figure 7 shows the three-month moving average of SIA's memory chip ASP. Once again, comparing figures 7 and 5, it is clear that the contract price is a more effective indicator.

Summary

Strong demand for memory chips will continue until 2023, as supply is limited not by shortages, but by capital expenditure, and strong demand for memory chips in areas such as 5G, servers and electric vehicles has given Micron Technology Inc a sustained boost.