Factoring in COVID-19 risks, but still increasing memory pricing forecasts
Memory stocks have retrenched 28% on average from their recent peaks. While COVID-19 presents demand risks notably for mobile (c.34% of memory demand), we continue to see solid datacenter compute and storage demand. Our updated supply/demand model indicates moderate DRAM undersupply until 3Q21 versus NAND gradually coming back to some oversupply in 4Q20/2021. We raise our memory pricing forecasts: we forecast blended DRAM contract prices to increase 10% QoQ (+6% previously) in 2Q20 and NAND prices to rise 3% (flat previously). With stocks averaging 1.18x NTM P/BV, we estimate that they are discounting memory pricing for 2020/21E c.7% below our revised assumptions. We estimate c.4:1 risk/reward for DRAM-related stocks.
Server procurement strength continues, offsetting smartphones risks
We touched base with over 25 tech supply chain companies. We believe the recovery in hyperscale server spending has continued for most US large customers, and has recently accelerated across Chinese customers (although the COVID-19 presents logistical challenges). While a pause is possible in 3Q, we expect growth to continue into 2021, not quite at 2017/18 speed, but sustainable. We believe this could push server DRAM contract pricing up >20% QoQ in 2Q20 with 32GB server DRAM pricing towards US$140-150. Solid state drive storage and flash arrays for servers are also robust. Mobile memory demand is seeing some modest downward adjustments in procurement and should ultimately be more negatively affected by COVID-19 than other segments. On the flipside, this may set the stage for a robust recovery into 2021.
How could the memory industry be re-shaped over the next 3 years?
The DRAM is consolidated and mature; we forecast a demand bit CAGR of 18% over the next 5 years. This does not mean that the DRAM industry gets a-cyclical as the pace of tech migration and wafer capacity increases, combined with inventories, can create temporary mismatch with demand. In contrast, the NAND flash industry is still fast-growing (we expect c.38% over the next 5 years). We see three possible sources of disruption in the NAND industry…