7.31.24
Samsung is the market leader in both DRAM and NAND and their memory divisions are just part of a massive conglomerate. I look through their earnings presentation and conference call transcripts for insight into the state of the memory market. This is not an analysis of their earnings, prospects, etc.
Earnings Presentation
- · AI investment by hyperscalers is leading to strong demand for HBM and for conventional DRAM and SSD.
- · Sequential earnings grew significantly, fueled by growth in HBM, DDR5 and other high-value-added products as well as overall price improvements.
- · In the second half of calendar 2024, demand from the AI server segment as well as for other server products is expected to remain strong.
- · Bit supply for conventional DRAM and NAND is expected to be “further constrained” by the ramp of HBM and server DRAM production. Samsung’s production of HBM is nascent. Just last quarter they barely mentioned HBM because sales were so small.
- · The small set of bullet points in the investor presentation didn’t mention PC or mobile, which is a statement on how weak demand is in those segments.
Earnings Call
These are the highlight quotes regarding DRAM and NAND:
- · In the quarter, the company continued “proactive investments” to meet demand for high value memory products such as HBM and DDR5.
- · The memory market in the second quarter “continued to recover due to strong generative AI server demands.” They said the server segment is also driving demand for conventional DRAM as well as for SSDs.
- · Demand from the PC segment continues to be relatively weak but demand for mobile remains solid, led by Chinese OEMs. Some customers are building inventory in anticipation of price increases.
- · Sequentially, HBM sales increased by mid-50% and server DDR5 sales rose by mid-80%, from both higher prices and shipments. Enterprise SSD sales rose mid-40%. Both of these DRAM comparisons are off of smaller bases than those of Hynix or Micron. Hynix is leading in HBM and Micron is ahead in DDR5.
- · The portion of AI servers in the market is expected to continually increase in the second half as investment continues in this segment. The executives noted – they are the first set to do so – that AI servers also feature high content per box of conventional DRAM and SSDs.
- · Seasonality and regular increases in memory content per unit, plus the much-anticipated on-device AI features, are expected to support PC and mobile demand in the second half of the year. Also, a first in this quarter from the big three, the company said they see elevated inventories at customers from the first half of the year that may dampen demand in 2H 2024. This is concerning.
- · With capacity being shifted to HBM, server DRAM and server SSDs to meet AI demand, conventional bit supply at the leading edge will be continuously constrained. Specifically calling out leading edge is telling. They are saying that demand from legacy nodes continues to be weak. This is seen across the industry in the softness in demand from the automotive and industrial segments.
- · They call the “range of market price increased by each application is forecasted to be decoupled” for an overall positive memory market environment. This is saying that different segments will see a range of ASP increases as AI demand is so much higher than demand from other segments.
- · According to one of the analysts, memory performance in Q2 exceeded market expectations. The company said because of limited capacity because of growth in generative AI, they “maintained [their] sales operations centered around profitability. I read this to mean they are maximizing memory selling prices in an environment of limited supply.
- · Mix and a better pricing environment let to prices rising in the high teens % for DRAM (was up 20% in Q1 and up very-low-teens % in Q4-23) and up low 20% range for NAND, sequentially. In Q1, NAND ASPs increased by low 30% (was up high-single-digit % in Q4-23.) The DRAM price increase included rising prices for conventional (non-AI) products. I think they called this out to specify that the rise in ASPs is not just from shifting more bits to HBM. DRAM bit growth from Q1 to Q2 rose mid-single-digits %, in line with their forecast (was down mid-teens % in Q1 and up mid-30% in Q4-23.)
- · NAND bit shipments declined mid-single-digits % quarter over quarter (was down low-single-digits % in Q1 and up in the mid-30% in Q4-23.)
- · Second quarter bit shipments of both DRAM and NAND exceeded production, leading to additional improvement in inventory levels.
- · The company expects favorable business conditions to continue for memory in the third quarter, though price increases will vary by product.
- · Bit growth in the third quarter for both DRAM and NAND will be in the low-single digits percent. They expect Samsung’s bit growth in Q3 to roughly match that of the overall market. They are signaling here that they don’t intend to grow their market share.
- · HBM3 revenue grew 3x in Q2 compared to Q1, though this is off of a tiny base (my comment, not from the company.) Commentary from the executive put a positive spin on their HBM position, a product category where Samsung is in third place out of three participants.
- · Total HBM revenue rose 50% sequentially in Q2. Going forward, the expect revenue from HBM to double every quarter, leading to a 3.5x in total HBM revenue in 2H24 over 1H24.
- · The company is seeking to double their HBM bit capacity in 2025 compared to 2024. They are targeting to reach industry-leading capacity in 2025. This is not surprising as Samsung has almost 2x the market share of Hynix and Micron, so if they match their market share in HBM, their total HBM bits will be the most in the industry.
- · In 2025, they are forecasting continued “very strong demand driven by Gen AI server application,” where industry supply growth is likely to be constrained. I am inclined to believe the second half of this statement because the DRAM producers can do a decent job of forecasting supply. The health of the memory market rides on the first part of the statement; how well demand for AI memory products holds up compared to the strong forecasts.
- · Because of ramping HBM bit production, supply of conventional DRAM based on advanced processes is “expected to see particular supply constraint.”
- · Reduces CapEx for NAND last year and currently is constraining supply. They expect bit growth in NAND to be limited and for supply to continue to be tight across the industry.
- · Samsung has recently received requests from customers to enter into annual supply agreements for 2025 for both DRAM and NAND. I have never seen this before. The company didn’t say how they responded to these requests. Their commentary suggests they will invest in 2024 similar to how they did in 2023. They cited investment in advanced packaging (for HBM) and said they are accelerating migration of legacy lines to advanced nodes. They are growing bits in both DRAM and NAND by migrating nodes faster rather than by adding wafers. This is in response to strong AI demand and weak legacy demand. CapEx now is also focused on building more cleanroom space so they can add capacity in the mid-to-long term. I read all this to be saying their CapEx now is focused on growing HBM and moving their production mix to more advanced nodes, and on adding cleanroom space for future wafer capacity. They seem to be signaling that Samsung is not yet adding capacity for the near term, which is a healthy sign for the memory market.
Summary
Prices were up high-teens % for DRAM and low-20% for NAND. Bit growth in the third quarter for both memory types will be low single digits %. During the second quarter, shipments of both DRAM and NAND exceeded production, leading to a decline in inventory levels. The company made the same comment about capital investment in 2024 that they did last quarter; they will invest in migrating technology nodes faster, in advanced packaging (for HBM production) and in cleanroom space to support future demand. Samsung also signaled that they will not seek to increase market share. They made the unusual comment that some customers have approached them seeking supply agreements for 2025 for DRAM and NAND. This is the first I have heard of customers seeking supply agreements beyond HBM. The NAND market continues to be supply constrained with no sign of capacity additions from Samsung, Hynix, or Micron. The DRAM market recovery is supported on the single pillar of AI demand. The PC and mobile segments continue to be weak. Samsung said they believe there will be an increase in demand from those two segments in the back half of the year caused by seasonality and by on-device AI functions. The former will be true to some degree. The latter I will believe when I see it. Samsung said the same things that Micron and Hynix did. They are not adding capacity yet. New investment is going to migrating nodes faster because the legacy markets are weak and demand for leading edge nodes is strong, led by AI applications. They are also adding cleanroom for future capacity needs. There seems to be a push-and-pull happening between memory makers and their customers. The manufacturers are holding back inventory to support pricing and customers, anticipating constrained bit supply caused by HBM demand, are seeking to build their own inventory. I am wondering if and when we will see some strength from the PC and mobile markets. If we get that along with continued strength in AI demand, prices should keep rising and the market will be healthy. If AI demand falters, I fear DRAM will quickly go back into oversupply.
-S. Hughes (cyclical long MU)