The AI revolution takes on the world’s most cyclical industry
Massive investment plans lead to investor fears of a new boom and bust in memory chips
A relentless run in semiconductor stocks has ground to a halt as investors begin to debate an old hazard: the risk of another glut in the notoriously cyclical memory chip industry.
Samsung Electronics is down by a third from its June high, despite stronger than expected quarterly guidance; SK Hynix had a successful US stock offering, but its South Korean shares are off nearly 40 per cent; and Micron has dropped more than 30 per cent.
The share price volatility illustrates the high-stakes race playing out between demand for memory chips from AI data centres on one hand and the colossal investments being made to increase supply on the other.
With semiconductor companies now some of the largest in the world by market capitalisation — as well as the best performing over the past year — the outcome of that race will affect returns for millions of investors.
Kwon Seok-joon, a professor at Sungkyunkwan University in Seoul, said expansion plans from the big memory chipmakers could push the industry into oversupply by 2028 if AI demand disappointed.
“Chipmakers are making these plans on the assumption that demand from AI data centres will remain strong for the next two to three years,” he said. “But memory demand will fall if returns on AI investments fail to meet expectations.”
Michael Burry, the investor made famous by The Big Short, said the spending surge was “the beginning of the end” of the current upcycle.
Writing on his Substack account, he disclosed a short position in Micron, arguing the company remained a textbook cyclical stock.
“When times are good, the stock gets pumped more than it should,” he wrote. “When times are bad, it gets dumped more than it should.”
Dynamic random-access memory, or DRam, is the short-term memory computers use to hold information as they carry out calculations.
Memory chips have emerged as an important bottleneck in AI data centres, with demand running ahead of supply and big short-term profits at the main producers.
But DRam is a highly cyclical industry, prone to booms and busts. Today’s three dominant suppliers are the survivors of a market that had about 20 players in the 1990s. Most fell by the wayside as the capital investments needed to stay competitive ballooned.
In recent weeks, all three companies have announced some of the largest investments the industry has ever seen, including what the South Korean government dubbed a “Great Leap Forward” — a combined investment by Samsung and SK Hynix that aims to double South Korea’s DRam output within five years.
Although most of the new facilities are unlikely to come online before 2030, the expansion would involve investments of more than Won2,000tn ($1.5tn) over the next 15 years, stoking fears of another boom and bust.
As well as these additions to supply, the sustainability of DRam demand has come under question, with investors wondering whether so-called hyperscalers can sustain their aggressive AI spending.
Reports that Meta plans to sell excess computing capacity have fuelled concern that demand could slow once the first wave of AI infrastructure is built.
Some analysts, however, argue this cycle differs from previous ones. “Experience is your number one enemy because every cycle is different,” said Daniel Kim, an analyst at Macquarie in Seoul.
“HBM’s wafer consumption penalty is getting worse, while DRam scaling is becoming more difficult technically,” he said, referring to the larger number of silicon wafers needed to make high-bandwidth memory, the variety most in demand for AI.
DRam shortages have been so great that customers have signed multiyear supply agreements with Samsung, SK Hynix and Micron, reflecting a focus on securing supply.
An executive in the memory industry said these new types of contracts, involving upfront payments that lock customers into multiyear commitments and pricing floors, reflected a mutual interest in avoiding the “volatility of an industry where we end up with massive oversupply and undersupply”.
Analysts note that new factories typically take years to build. Construction of SK Hynix’s Yongin project was announced in 2019; it is expected to begin limited production only at the end of 2027. Nomura estimates any acceleration of existing construction plans would still take at least five years to affect supply meaningfully.
Building new factories is not merely a question of investment, but securing permits, skilled engineers and construction workers. In the US in particular, Micron is competing for resources with the very AI infrastructure clients it serves.
Kwon of Sungkyunkwan University said oversupply was less likely in HBM because the chips were highly customised. Conventional DRam, however, could face excess capacity from 2029, he said.
The biggest uncertainty is China. ChangXin Memory Technologies is preparing for a $9.8bn listing that could fund further capacity expansion, helping it break the longstanding dominance of the three main players.
Morgan Stanley estimates China will account for about 30 per cent of net DRam wafer additions through 2028, second only to South Korea.
“China will be the decisive variable,” said Kwon. “Korean companies say they will adjust their investments depending on market conditions. But they will find it harder to control supply if CXMT expands more aggressively than expected.”