Fasten your Seatbelt, Semiconductors could hit a wall.

 

The evolving memory market

The top suppliers of Semiconductor NAND and DRAM have reported their Q1-18 results. For the first time in 9 quarters, there is a decline in one of the two major groups of memories. NAND flash declined by 2.8% while DRAM kept growing. While DRAM revenue was less than NAND revenue at the beginning of 2016, it has now grown to become the largest component of the memory market.

A key driver of this market change is the lack of supply that has increased prices of both DRAM and NAND. The investment response from the memory companies has been skewed in favour of NAND in the expectation that the Mobile and Datacenter markets would drive demand. The current reality is that both markets have demanded more DRAM than expected, far outpacing supply.

 

 

 

Memory Consumption

During this memory upcycle, all main memory market has grown, only the Datacenter market has taken a share of the market. From under 20% of the memory market in Q1-16, the Datacenter now consumes close to a third of all the memories produced. As memories for the data centre is bought based on a corporate investment strategy, it is not as sensitive to price increases as the other memory markets dominated by consumer decisions.

The mobile market, especially in China has suffered under the increased pricing of memory to the level where the Chinese government has tried to intervene. The PC and Graphics market consists of a declining PC element and a growing graphics element helped by the growing market for crypto mining equipment.

 

 

 

The shifting workload in the Data Centre

The impact of DRAM consumption in the Datacenter is obvious. The Hyperscale Cloud Data Center is changing workload from storing and delivering data to clients to increasingly working on Big Data and Artificial Intelligence tasks. These new tasks require processing of data inside the data centre and as a result, large banks of working memories in DRAM. The focus is shifting from moving data to mining data.

 

 

The Future of the Memory Market

While both the DRAM and the NAND manufacturing capacity has been to low to meet the demand for over two years, NAND supply now shows signs of reaching the market demand. The mobile market will still be under the influence of high DRAM pricing but is likely to increase if DRAM pricing declines. The key to the near-term future of the memory market is DRAM capacity.

The results of the suppliers of Semiconductor manufacturing equipment can give insights into the investments in the different product areas. The largest supplier of manufacturing equipment is Applied Materials, they have reported the following share of revenue:

 

Q1-18 Q1-17
Foundry 21% 41%
DRAM 31% 19%
NAND 37% 33%
Logic/Other 11% 7%

Although the investment in different product areas is not equal, it is obvious that the Semiconductor Companies are moving a significant part of their investments towards memory. From 52% of revenue a year ago to 68% today. NAND investments are still growing although the market indicates equilibrium. This could signal a sharp dive in NAND pricing. DRAM investments have increased significantly and will be in catch up mode for quite some time. The more worrying element is that foundry investments have declined as a share of revenue. Outside DRAM, it does not look like the investments in new capacity is well aligned with the market outlook.

Reporting from KLA-Tencor and LAM research show a similar picture:

 

 

 

If you are an investor, you might want to move your investments from NAND towards DRAM. If you are a semiconductor buyer, you might want to fasten your seatbelt. The next couple of years could be a bumpy ride as there are limited investments going into Foundry and Logic capacity causing potential droughts and price increases on almost all other products than NAND, that looks heavily overinvested.