No One’s Feeling Chipper About Chips


Almost all the gains in U.S. technology stocks have now been wiped out this year. Across the Pacific, the rout has been going on for some time already.

Korea’s benchmark Kospi Composite Index fell into a bear market Thursday, dragged down by

Samsung Electronics

and memory-chip maker

SK Hynix
.


000660 3.55%

The two companies, which together account for around a quarter of the index, have fallen around 30% from their peaks late last year, despite both continuing to report record earnings. SK Hynix said Thursday its operating profit last quarter rose 73% to $5.7 billion. Samsung said earlier this month its third-quarter operating income would be its highest ever, up 20% from last year.

The market’s worry is that the boom in memory-chip prices, which lies behind these record profits, is ending. Heavy demand from data centers, boosted by the increasing use of cloud computing and artificial intelligence, had pushed prices of DRAM—a type of memory chip used in data processing—to more than double in the past two years. Now, supply is catching up. Capital spending on DRAM globally has grown 40% this year to $22.9 billion, according to market research company IC Insights.

SK Hynix said Thursday its operating profit last quarter rose 73% to $5.7 billion.

SK Hynix said Thursday its operating profit last quarter rose 73% to $5.7 billion.


Photo:

lee jae won/Reuters

As the market rebalances, DRAM prices could fall by 5% this quarter from the last one, research company DRAMeXchange predicts, ending a nine-quarter growth streak. They could fall a further 15% to 20% next year, it reckons. Meanwhile, prices for NAND—another type of chip used in storage that both Samsung and SK Hynix manufacture—have already been falling and could plunge by 25% to 30% next year.

The good news is that the downturn in chips could prove less severe this time than in previous cycles, largely because the market has become more consolidated. Three companies—the two Korean giants and Micron from the U.S.—basically control the whole DRAM market. And their share prices now reflect much of the pessimistic outlook. Samsung trades with an enterprise value a mere 2.3 times its expected earnings before interest, taxes, depreciation and amortization—a five-year low.

That doesn’t mean that it’s time now for investors to jump in, especially when the U.S. tech selloff seems to be picking up steam. The PHLX Semiconductor Index—a gauge of U.S.-listed chip stocks—has lost 10% in the past week, but has still outperformed the Kospi this year.

The chips may be down but it’s worth waiting for cheaper bargains in chip stocks.

Write to Jacky Wong at JACKY.WONG@wsj.com



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