Where Is The DRAM Market Headed?

The DRAM market is booming, with prices more than doubling over the last 12 months, allowing major memory manufacturers like Samsung Electronics (OTC:SSNLF) to post record quarterly profits. The near-term outlook also remains positive, amid growing demand and relatively tepid supply growth. In this note, we take a look at some near-term factors that could impact the DRAM markets.

See our complete analysis for Samsung and Micron

Strong Demand From Mobile, Cloud Vendors

Demand for DRAM has been strong, with smartphone manufacturers increasing DRAM content on their high end devices. For instance, Android vendors now offer as much as 8 GB of DRAM on devices (as much as mid-range laptops) and both of Apple’s premium iPhones offer 3 GB of DRAM. Demand from the cloud computing market is also growing, as major Internet players such as Amazon and Google build big data centers. Trends such as machine learning, AI (artificial intelligence) and self-driving cars are also likely to boost memory demand over the medium term.

DRAM Demand Is Relatively Inelastic

DRAM is a commodity product, and its prices are largely governed by demand and supply factors. Unlike NAND chips, which see some price elasticity of demand, meaning that customers scale back on NAND memory content on their devices when prices rise, DRAM chips are relatively inelastic. This is because device manufacturers need a certain amount of DRAM to meet performance requirements for systems that they may have worked on developing several quarters ago. This forces companies to buy DRAM irrespective of higher prices, without being able to meaningfully scale back.

Consolidation In The DRAM Market Has Improved Pricing Power

The DRAM market has essentially become a three player game with Samsung, Micron and SK Hynix controlling much of the industry supply. The three players grew their combined market share from just under 60% in 2007 to 95% in Q2’2017 on account of multiple acquisitions and some bankruptcies in the industry. This has significantly improved the pricing dynamics of the industry, and has also moderated the extent of the DRAM cycles, with the peak-to-trough declines in the memory market moderating.

DRAM Players Are Being Circumspect About Scaling Up Production 

Major players have also been more disciplined with their capital investments. Per Goldman Sachs, estimated DRAM capital expenditures for 2017 will grow by 24% year-over-year, well below their 2015 peak, despite the fact that prices have been trending up significantly.  Moreover, companies are focusing their investments on technology transitions rather than outright capacity expansions. This could keep DRAM supply in check in the near term, potentially boding well for pricing. For instance, Micron expects DRAM supply growth to remain around 15% to 20%, with DRAM demand growth ranging from between 20% to 25%.

Will China Double Down On Memory Production?

That said, there are longer-term risks. Two years ago, the Chinese government announced plans to invest about $160 billion over the next decade to bolster the country’s semiconductor industry – a key area in which it has lagged behind its Asian peers. This has raised concerns that China could flood the market with cheaper memory chips, much like it has done in industries such as LED lights and solar panels. That said, China currently lacks the intellectual property required to produce chips at scale in a cost-efficient manner.

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