DRAM over Semi Foundries

The semiconductor industry has stolen the limelight during the pandemic. However, with end-demand softening and new capacity coming online over the next eighteen months, there are growing concerns over inventory correction. On the TSMC earnings call, management spoke about ‘inventory digestion’ for end-products. No one knows how long this correction is going to last given ongoing global uncertainties. And foundry capacity has become a geopolitical issue, so the risk of future over-supply is elevated. We are more positive on the memory sector, DRAM specifically, compared to semi foundries due to its flexibility to manage supply-side dynamics and manage inventory swings. The trio of Samsung Electronics, SK Hynix and Micron control 95% of the DRAM market, and it appears they are taking steps to manage supply; Micron announced a cut to 2023 capex and it is rumored that Hynix will cut capex by 25% next year. DRAM spot prices are forecast to continue to fall through year-end, but with supply discipline, prices may stabilize and move higher in 2023. The memory trio have seen consensus earnings cuts of 25% over the past year, reflecting the demand headwind. On the flip side, TSMC, the largest semi foundry, has seen a 40% upward revision in consensus forecasts. We believe memory is priced for the slow down and ASPs will recover next year, while semi foundries are still priced for perfection.