The semiconductor sector appears overbought at current levels but the “long memory trade” feels alive and well, Mizuho analysts said, driven by a cycle that seems to be accelerating to the upside.
Analysts note that any risk of peak pricing and fundamentals appears to be at least 12 months away, possibly longer, depending on the actions of key suppliers regarding new capacity additions.
Despite reservations about recommending stocks that feel widely owned and consensus, they remain bullish on the upside potential and fundamentals for DRAM and NAND.
Within this, Mizuho believes Samsung (KS:) and Western Digital (NASDAQ:) sit “at the top of the list due to best combo of upward revision potential and valuation.”
Hynix is seen as a third favorite due to its leadership in the high-bandwidth memory (HBM) DRAM field, followed by Micron (NASDAQ:).
While Samsung’s recent price action appears choppy compared to SK Hynix and Micron, it should not deter investors on the long side “as the “mother of all catch-up trades” still remains a likely possibility for Samsung,” Mizuho noted.
This view is based on two key factors, including expectations that Samsung will receive final qualification for HBM with Nvidia (NASDAQ:) and that it will “start beating and raising in memory due to strong price appreciation in legacy DRAM where they command by far the largest available capacity and supply,” said analysts.
Mizuho foresees the performance gap in the memory sector narrowing over the coming year as Samsung’s memory results improve significantly due to much higher pricing in legacy, conventional DRAM.
The firm believes that Samsung’s 12% appreciation over the past 52 weeks, compared to 100-115% for its peers, is not sustainable. It did emphasize, though, that Samsung must address its issues in DRAM, particularly where it has faced design problems on the front end.
“Nothing is a given, and Samsung has to execute much better for the stock to start working, but the simplicity of this story is that Samsung’s financials move by far the most with memory,” analysts wrote.
During the last cycle peak, Samsung’s DRAM operating margins exceeded 50%, higher than those of Oracle (NYSE:), Mizuho analysts highlighted. If the company can see improvements in demand and pricing for legacy DRAM while keeping supply tight, the success in HBM over the next year becomes less critical.
“They will start printing money in regular DRAM and their volume of turnover there would be super high,” analysts added.