One corner of the semiconductor market is “materially cheaper” than it used to be — memory chips, according to Morgan Stanley. “The thing that most people focus on is how much a stock is up today … but, based on the earnings revisions today, memory stocks are materially cheaper today that they were in the previous cycle,” the bank’s analysts wrote in a Dec. 13 note. They said the sector is set to enter a period of accelerating growth and improving demand. Memory chips have been in the spotlight this year as artificial intelligence ramps up. For example, memory with high performance and bandwidth is used in Nvidia’s H100 graphics processing units. GPUs underpin most generative AI tools, and Nvidia’s GPUs dominate the market. In the note, Morgan Stanley raised its 2024 first-quarter outlook for the pricing of both DRAM and NAND memory chips. DRAM, or dynamic random access memory, is a type of semiconductor memory needed for data processing. NAND is another type of memory that stays viable without a power source. “Production remains well below demand after aggressive production cuts, and with the improving demand environment driving greater certainty on the pricing outlook into 2024,” the bank said. Morgan Stanley also highlighted that high bandwidth memory has a total addressable market worth $10 billion that was “not here” six months ago. It’s referring to the high bandwidth memory segment in the DRAM sector, a key component needed to run Nvidia’s AI processors, such as A100 AND H100 — something that regular DRAM cannot do. The bank also noted the “sudden birth of AI demand that will cause supply shortages to lengthen.” It said that while most of the demand for AI applications is on the cloud, demand for what it has termed “Edge AI” is set to increase. The trend involves running AI algorithms directly on a user’s device, be it a smartphone, laptop or wearable, among other things, according to the bank. Two names to buy Morgan Stanley says it’s raising its earnings per share estimates for South Korean giants Samsung and SK Hynix , both of which are among the world’s largest producers of memory chips. It’s overweight on both names. It says it expects SK Hynix to turn profitable in the fourth quarter and begin an earnings cycle that should reach “record levels” by late 2024 or early 2025. That’s on the back of high bandwidth memory growth and sharp improvement in the prices of commodity products, it said. “The stock is not pricing in the attractive risk-reward and positive catalysts ahead in 2024, in our view,” Morgan Stanley said. “Hynix should re-rate further as growth and margins outperform those of peers and exceed consensus expectations.” It gave the stock a price target of 210,000 Korean won ($160), or potential upside of about 52%. As for Samsung, the bank said it’s “on a mission to drive margins quickly.” “We expect Samsung’s memory business to turn profit in 1Q24, helped by its continued production cuts and pricing power come back as the supply and demand gradually rebalance into 2024,” Morgan Stanley said. The bank gave Samsung a price target of 95,000 Korean won, or potential upside of about 29%. — CNBC’s Michael Bloom contributed to this report.
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