Summary of Key Points
Recently, the stock markets in South Korea, Japan, and the United States have been volatile, with concerns about the potential bursting of the AI bubble. The focus has shifted to whether storage stocks are cyclical or growth stocks. This article uses theoretical arguments (the three characteristics of commodities) and historical data (nine cycles in the DRAM industry) to prove that storage stocks are essentially cyclical. However, Wall Street believes they have become growth stocks, citing four main reasons. The author disputes these arguments, concluding that while the cycle period for storage stocks has extended from 3-4 years to 7-10 years, their short-term performance may resemble that of growth stocks due to AI demand, but they cannot escape cyclical fluctuations in the long run.
I. Understanding the Difference Between Cyclical and Growth Stocks
The difference between cyclical and growth stocks can be illustrated with two analogies:
- Cyclical stocks are like the changing seasons: They experience periods of boom and bust, never remaining consistently hot or cold. For example, when pork prices are high, more people raise pigs; once supply exceeds demand, prices fall, leading to fewer pig farmers, which in turn raises prices again, creating a recurring cycle.
- Growth stocks are like trees: They continue to grow upward, and even under poor conditions, they only pause temporarily, not reversing their growth trend. For instance, the stock price of茅台 has been rising over the years despite fluctuations.
To determine whether a stock is cyclical or growth, it’s crucial to consider whether its performance resembles the changing seasons or continuous growth.
II. Are Storage Stocks Cyclical?
Storage stocks meet all three defining criteria for cyclical stocks:
1. Long capacity construction times: Building a storage chip factory takes 18-36 months, and even longer for DRAM (memory). For example, supply and demand will not balance until 2028 for NAND flash memory and after 2029 for DRAM. By the time capacity is available, market conditions may have changed.
2. High volatility in supply and demand:
- Chips are considered the “oil of the 21st century” with strong demand but limited price elasticity (consumers still buy even when prices rise).
- The industry chain is long (from end-users to chip manufacturers, taking more than half a year), which can amplify small changes in downstream demand.
- The market is highly affected by economic cycles, natural disasters (e.g., pandemics), and geopolitical conflicts (e.g., the Middle East).
- There is significant financial speculation (chip derivatives worth $110 billion), further increasing price volatility.
3. Product homogenization: Storage chips lack differentiation; they are either qualified or not, with no significant difference between products from different manufacturers (e.g., Samsung and Hynix).
These three factors combined result in dramatic price fluctuations: rising demand → price increases → capacity expansion → overcapacity → price drops → losses → reduced production → renewed demand, creating a recurring cycle.
III. Historical Evidence: Five Decades of Cyclical Fluctuations in the Storage Industry
The DRAM industry has experienced nine cycles over the past 50 years, each following the same pattern of rising prices, capacity expansion, falling prices, losses, reduced production, and then another rise:
- 2016-2019: Surge in cloud computing demand → price doubling → Samsung expanded capacity → trade wars and mining bubble burst → price drop by 79%.
- 2020-2023: Pandemic-driven home demand → price recovery → capacity expansion → weak demand for PCs and smartphones → consecutive losses for the top three companies.
- 2024-present: Surge in AI server demand → sharp price increases → concerns about future overcapacity.
Historical data confirms that storage stocks are cyclical and cannot escape this pattern.
IV. Wall Street’s Arguments That Storage Stocks Are Growth Stocks: All Four Are Weak
Investment banks recently argue that storage stocks have become growth stocks, based on four reasons:
1. AI-driven demand transformation: AI demand is expected to last 7-10 years, but this only extends the cycle, not eliminates it.
2. Long-term supply agreements (LTAs): Companies like Micron have signed long-term contracts locking in 20% of DRAM and 33% of NAND shipments, with high margins. However, such one-sided agreements may not be sustainable as customers will not tolerate being at a disadvantage indefinitely.
3. Strengthened supply-side constraints: Oligopolies (the top three companies control 90% of DRAM production) might limit capacity. However, this argument is challenged by South Korea’s investment in new facilities (600 billion USD), which exceeds the U.S. chip bill's 52.7 billion USD. Additionally, Chinese companies like ChangXin and Yangtze Memory are catching up, potentially breaking the oligopoly’s dominance.
4. Product customization: Customized products (e.g., HBM for NVIDIA) exist, but customers often use multiple suppliers. Customization does not change the homogenization of storage chips; it only binds them to specific buyers temporarily.
V. Final Conclusion: The Cycle Has Not Disappeared, It’s Just Slowed Down
The author believes that:
- The cycle period for storage stocks has lengthened from 3-4 years to 7-10 years due to sustained AI demand.
- Currently, we are in an upward phase of the cycle, and short-term (1-2 years) performance may suggest growth, potentially leading to higher stock prices.
- However, in the long run, we must be cautious: Oligopolies’ capacity expansions (e.g., South Korea’s investment) or a slowdown in AI demand could trigger a downward cycle.
In summary, while storage stocks may perform well in the short term due to AI trends, their cyclical nature means prices will eventually fall. Investors should focus on capacity changes (e.g., Samsung and Hynix’ expansion plans) and demand growth (e.g., whether AI server sales exceed expectations) to avoid buying at the peak of the cycle.
End of Article.