Key insights
- The author expresses concern that DRAM stocks, particularly Micron and SK Hynix, are overvalued due to the market extrapolating current peak conditions driven by AI demand too far into the future. While acknowledging the strong bullish case, the author highlights the cyclical nature of the memory industry and suggests that record margins are unsustainable, potentially leading to a correction in stock prices.
Edit to address backlash: I did not mean to offend the Bullish investors. I totally agree memory plays a crucial role in AI ecosystem. I have been invested in memory stocks for a long time now. I am increasingly getting sceptical of the rising valuation and not the business itself. It is the most cyclical industry I have ever seen and that is why multiples have been so low.
Not financial advice. The bullish case for DRAM/memory stocks is strong: AI demand is huge, HBM is supply-constrained, and companies like Micron, SK hynix, and Samsung are performing well.
The market seems to be treating today’s shortage as if it will become a permanent new normal. Maybe it will. But memory has historically been one of the most cyclical parts of semiconductors. When pricing is tight, margins explode. When supply catches up or demand pauses, margins can fall brutally fast.
My bearish view is not “DRAM companies are bad.” They are not. My view is that the stocks may be extrapolating peak conditions too far into the future.
Also, record margins are probably not normal margins.
Micron’s results showed massive revenue growth and very high gross margin guidance. SK hynix also reported operating margin ~72%. Those numbers are incredible, but it would not be fair to assume peak margins are permanent.
The trade is becoming crowded.
I’m not saying “short DRAM.” I’m saying I would be very careful buying if it was near its cyclical peak. Low P/E ratio is not always same as Cheap.