Why memory stocks are cyclical ? and what is cyclical ?
"Cyclical" doesn't describe investor mood. It describes earnings. Memory makers swing from record profits to heavy losses and back, and the stock follows the earnings.
The loop runs like this:
- Demand jumps (PCs, phones, servers, now AI). Supply can't keep up. DRAM prices rise and margins explode.
- Every manufacturer starts building fabs. A new fab costs $10-20B and takes 2-3 years to come online.
- The new capacity lands at roughly the same time for everyone, often just as demand cools. Customers who double-ordered during the shortage stop buying and burn through inventory.
- Oversupply. Prices crash. Fixed costs are so high that fabs keep running even at a loss. Micron lost $5.8B in fiscal 2023.
- Everyone cuts capex. A few quarters later there's a shortage again.
Memory is more cyclical than the rest of semis because it's a commodity. A Samsung DRAM chip replaces an SK hynix or Micron chip. Price is set by supply and demand alone, like oil. A logic chip from Nvidia or Apple is specific to its design, so the maker keeps pricing power. Hard drives (Seagate, Western Digital) behave more like memory.
The market looks 6 to 12 months ahead. So the stock bottoms when losses are deepest and the P/E looks absurd. It peaks when earnings hit a record and the P/E looks cheap. Peter Lynch's rule for cyclicals follows from that: buy when the P/E is high, sell when it's low. The opposite of what the multiple seems to say.
The open question is HBM. It's sold on long contracts, almost made to order, and some investors argue that dampens the cycle. Guess we can't know until AI demand slows down (if it does..).