The 1999-2000 Memory Shortage Redux - Blame It On The iPhone 8 This Time?

Summary

• The iPhone 8 has exascerbated the memory shortage as customers have been moving forward procurement decisions.
• The rationale is reminiscent of the 1999-2000 DRAM bubble because of perceived shortages of the devices.
• New NAND fabs and an increase in 2D to 3D NAND conversion will mitigate the supply/demand problem in 2H 2017.

According to a Reuters report, electronics manufacturers around the globe are scrambling for parts, especially for DRAM and NAND chips, to keep their production lines running as Apple’s (AAPL) component orders for its upcoming iPhone 8 are creating a worldwide shortage.

The report noted that:

"After the supply shortages emerged we brought forward our procurement decisions ... to ensure a stable supply," smartphone and personal computer maker LG Electronics said in a statement, adding it had pushed up quarterly purchase decisions by about a month.

Reuters reporters noted that 18% of NAND supply is bought by Apple. They anticipate that as many as 100 million iPhone 8s could be sold this year, significantly more than the 82.3 million iPhone 7s sold in 2016.

I noted in a May 16, 2016, Seeking Alpha article entitled “A Shortage Of NAND Flash Memory Is Coming Soon - What Caused It And What Will Be Its Impact,” that:

“There were no NAND shortages in 2014 and 2015, although they were predicted, as we saw a slowdown in tablet and smartphone sales, flash cards, and USB/flash. Growth, however, was sustained in the SSD sector as they increasingly took market share from HDD sales.”

And that the current shortage in NAND was:

“due to most major vendors not ramping up their 2D NAND flash chips over the past 18 months and that their migration to the production of 3D parts as not being smooth.”

This latest Reuters report corroborates my analysis of the semiconductor market bubble in 2000, which I discussed in a June 12, 2017 Seeking Alpha article entitled “Semiconductor Equipment: Supercycle Or Bubble?” I noted that the 1999-2000 semiconductor bubble was primarily attributed as:

“A perceived shortage of DRAMs. At the time, semiconductor DRAM manufacturers didn't realize that PC manufacturers were purchasing twice the DRAMs they needed because Gartner had forecast a shortage of the chips. In turn, DRAM manufacturers started increasing production to meet the "perceived demand," and ordered more equipment to increase capacity. Equipment shortages followed and semiconductor manufacturers ordered even more equipment to make sure they received their allocation.”

The shortages we are seeing in 2017 are due to several factors, including strong demand, sluggish investments in 2016, and difficulty in 2D to 3D conversion. But according to the data in the Reuters report, some of these shortages may attributed to the moving up of NAND procurement. This is, in effect, a repeat of the cause of the 1999-2000 memory bubble.

Investor Takeaway

According to a June 2, 2017, research report from Mirae Asset Daewoo Research, we may be nearing a period of lower demand for memory because:

• Memory demand is forecast to weaken in 2H, in light of the unfavorable outlook for major PC makers, such as Intel and AMD
• Nvidia, which boasts strong growth, is seeing momentum weakening in the gaming PC segment
• Earnings at foundries like TSMC and UMC are slowing, due to inventory adjustments

In the same period, supply is anticipated to expand in 2H, Samsung Electronics’ (OTC:SSNLF) 18nm DRAM production will likely expand, and a new 3D NAND fab should come online, driving up DRAM and NAND shipments by 8% and 6%, respectively, according to the investment house.

The two charts illustrate the shipment trends for DRAM and NAND and lower demand of the ICs.

Another consideration is the growth in NAND wafer starts. In 2016, installed capacity was 350,000 to 400,000 wafer starts per month (wspm) in terms of worldwide installed capacity for 3D NAND. As SSNLF and SK Hynix bring new NAND fabs online, capacity will ramp to between 500,000 and 700,000 wspm at the end of 2017.

The transition from 2D to 3D NAND will increase chip count. More importantly, a 2D NAND 300mm wafer contains about 5.5 terabytes of NAND memory, while a 3D NAND wafer contains 17.2 terabytes of NAND.

The increase in 3D NAND transition and ramp in wafer capacity will significantly increase supply in 2017 compared to 2016.

The lack of supply and moving up of NAND procurement has benefited all memory suppliers, and not only SSNLF which supplies to AAPL. However, supply and demand conditions could deteriorate in 2H 2017 due to memory supply growth

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.